To help the organization attract more private capital liquidity sources in the event of a severe market downturn, the Mortgage Bankers Association (MBA) proposed Ginnie Mae develop a new early-buyout (EBO) securitization option designed to help withstand such an event.
The proposed EBO security would be comprised of non-performing Federal Housing Administration (FHA), Veterans Affairs (VA), and USDA loans bought out of traditional Ginnie Mae pools, according to the mortgage industry’s largest trade group.
“MBA’s proposed Ginnie Mae Early-Buyout (EBO) securitization would expand liquidity for government servicing through all economic cycles,” MBA President and CEO Bob Broeksmit said in a press release. “An EBO security addresses the timing mismatch within Ginnie Mae’s program, helping to alleviate an ongoing issue that has concerned issuers and regulators alike. It also has the potential to increase the value of Ginnie Mae servicing, which could translate into lower costs for FHA, VA, and USDA borrowers.”
When an issuer purchases loans out of the pool, they no longer have to continue making principal and interest payments to investors during periods where they are not receiving payments from borrowers. However, because independent mortgage banks (IMBs) do not have large balance sheets to hold nonperforming loans for extended periods, buyouts become capital-intensive and can create liquidity stress, the trade group explained. The EBO security provides a new source of liquidity to help IMBs and other issuers better manage the liquidity challenges of participating in the Ginnie Mae program.
The EBO security also would be tailored to allow issuers to sell EBO pools to private investors who would receive an accrual of the scheduled principal and interest payments when the loans resolve. Primary guarantees from FHA, VA, or USDA would repay the investors the principal and accrued missed payments.
“An EBO securitization would expand liquidity for IMBs, who account for more than 85 percent of Ginnie Mae issuance, ensuring they have the ability to lend to first-time and low- and moderate-income homebuyers through all economic cycles,” Broeksmit noted. “Importantly, Ginnie Mae can implement this under its existing program authority and has the necessary funding and staff resources to do so.”
MBA introduced the proposal in its white paper, titled “Ginnie Mae EBO Securitization.” The white paper describes how the inherent timing mismatch in principal and interest payment advances within the Ginnie Mae program has caused liquidity concerns and regulatory anxiety. It also outlines the benefits of the EBO security to issuers, investors, warehouse lenders and consumers.