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National Mortgage Professional
Feb 07, 2007

Forward on reverse: Ginnie Mae gets reverse ready ... A conversation with Robert M. CouchAtare E. Agbamu, CRMSReverse mortgage, Ginnie Mae, Government National Mortgage Association, Robert M. Couch, New South Federal Savings Bank Ginnie Mae is getting reverse-mortgage ready. What does that tell you? Who is Ginnie Mae anyway? Ginnie Mae (aka the Government National Mortgage Association) is a federal agency within the U.S. Department of Housing and Urban Development (HUD). While it may not be as visible in the primary mortgage market as its bigger and better known government-sponsored enterprise siblings Fannie Mae and Freddie Mac, sister Ginnie is an important actor in the secondary mortgage market in America; indeed, in the world. Because of Ginnie Maes role, first-time homebuyer Reuben Gonzalez, despite his dented credit, could buy a home and get a Federal Housing Administration (FHA)-insured mortgage at sixeven 5.75percent, where he could have been stuck with a non-prime mortgage at 8.25 percent. How does Ginnie do it for government loans? The trick is mortgage-backed securities (MBS), which it pioneered in 1970. Lenders gather FHA or U.S. Department of Veterans Affairs mortgage loans in a pool. They go to Ginnie Mae for commitment authority to issue MBS to investors. The securities are backed by mortgage payments from mortgages in the pool. For the commitment authority to issue MBS and to obtain its guarantee of timely payment of principal and interest, Ginnie Mae charges lenders a fee. Thats Ginnies core business. Its an insurance company. So, how did Ginnie Mae help Reuben Gonzalez get a better-priced home loan? Investors in that serious-money alley in Manhattan called Wall Street love Ginnies MBS. They affectionately dub them Ginnie Maes. They love them so much they pay more (premium) for them. Lenders return this premium pricing to the Reuben Gonzalezes of America as better interest rates, nevermind their weak credit or no credit history. Got it? Now, why do very smart investors all over the world pay top dollar for Ginnie Maes? It is because of a very important idea called full faith and credit. Every Ginnie Mae-backed MBS comes with this full faith and credit seal. It means Uncle Sam is behind those securities issued to investors. If mortgage payments somehow stop and there is no cash to pay investors from the pool of government mortgages behind the pieces of paper issued to investors, the U.S. government will pay the investors. Investors know Uncle Sam isnt going out of business as mere lenders could, no matter how big they may be. It has an outstanding record of paying its debts; plus, it has more than 300 million citizens it could tax if push comes to shove at payback time. Friends, what Ginnie Mae has done for government loan borrowers on the forward mortgage side, it is getting ready to do for reverse mortgages and Americas growing older-adult population who use reverse mortgages to turn the equity in their homes into cash for a more secure retirement. This is huge. This is historic. If you ever doubted that reverse mortgages are ready to rock, doubt no more. Personally, Ive never been more excited about the opportunities and challenges in reverse land. The change agent behind this massive Ginnie Mae initiative is its new president, a nice fellow and big-league mortgage banker, Robert M. Couch. He was appointed by President Bush and confirmed by the U.S. Senate in June 2006. On Oct. 17, 2006 the former president/CEO of New South Federal Savings Bank in Birmingham, Ala. (the largest thrift in Alabama with assets of $1.8 billion) announced Ginnie Maes reverse mortgage MBS plans. As president of Ginnie Mae, the former director and chairman of the Mortgage Bankers Association of America oversees Ginnies $410 billion MBS and $125 billion Real Estate Mortgage Investment Conduit programs, as well as its mission to bring affordable housing via low-cost mortgages to millions of low- to moderate-income households across the nation. I spoke with Mr. Couch recently. The following is a transcript of our conversation. Atare E. Agbamu: Rob, you announced at the National Press Club that Ginnie Mae is creating an HECM [Home Equity Conversion Mortgage] MBS. When will it be rolled out? Robert M. Couch: At the press conference, we stated our plan is to do the Ginnie Mae HMBS sometime in fiscal year 2007 or prior to Sept. 30, 2007. Thats about as good a date as I can give you. AA: I guess your technical people are fast at work on the product. RC: Thats correct. Weve issued to some of the larger servicers of HECMs some proposed specs over the last couple of weeks. They have up till Dec. 1 to get back to us with comments and suggestions. At that point, we would take those into consideration and decide whether we need to change those specs. Thereafter, we hope to have final specs in place. And at that point, the servicing industry has got to work to make the changes in their systems they need to make. We will also be at a point where our system providers can go to work on their projects to get our systems where they need to be. AA: In some of the papers youve put out on this initiative, you said this initiative will bring about more attractive reverse mortgage borrowing options. What are some of these more attractive reverse options you envision? RC: Currently in the marketplace, there is no investor demand for fixed-rate HECMs. We envisioned that fixed rate HECMs will be originated and securitized. Thats probably the best example of additional product. But more importantly, we believe that the HECM securitization vehicle will mirror what is happening in the forward mortgage market where Ginnie Mae securities trade at a premium and thus interest rates are lower, and those lower interest rates are passed through to the borrower. We have studies that estimate the advantage from a Ginnie Mae-guarantee security results in somewhere between 30 and 80 basis points lower interest rates to the borrower. We see no reason that same advantage cant be passed through to a HECM borrower once Ginnie Mae enters the market. AA: When can lenders and borrowers expect to see the benefits of this initiative? RC: We have no way of knowing how receptive the market will be to the Ginnie Mae product. The greater the penetration rate Ginnie Mae has in this field, the quicker the benefits will be seen by borrowers. If we are successful in structuring something that is received well by the marketplace so that theres a lot of demand for it, the borrower will benefit. AA: Do you plan to do some test runs in the market before the actual launch? RC: No, not really. I think well actually go live with this. We have given presentations to a number of investment banks about our product. I feel certain someone will jump out in the lead to do the first one. It will be a real Ginnie Mae security and well be on the hook for the full faith and credit guarantee of the security. AA: In the literature you sent out, you said that the HECM MBS will help achieve five goals. The goals are: deepen and broaden the availability of HECM lending from multiple lenders, increase the type of HECM loans offered, reduce borrowing costs, create a broad secondary market for HECMs and increase market liquidity. How will these goals be achieved? RC: Well, simply by having guaranteed security. Ginnie Mae securities today are very liquid. About $410 billion of Ginnie Mae securities are in the marketplace and they are highly liquid. You can buy and sell them virtually from any broker/dealer. We anticipate that any approved Ginnie Mae issuer will be eligible to participate in this program. We currently have 270. That means that our participation in the marketplace will make this a more mainstream product. AA: But not all of your issuers right now can still do it given the size of the reverse mortgage market. They still have to have a servicing capability; they can do it themselves or contract it out, and they still have to have the experience of originating and servicing reverse mortgages over a period of time. I see maybe three lenders taking advantage of this HECM MBS: Financial Freedom, the largest reverse mortgage servicer and lender in the country, Wells Fargo and Seattle Mortgage. With the exception of these big three, other big lenders may not have the required intellectual capital to do these loans yet because they are very different, as you well know. RC: They are very different, but the evolution of the marketplace is picking up speed. There are a lot of people who are actively trying to get into this field. Lets just take the worst-case scenario: Lets say the top three or four are the only ones at it. Today, they have a very limited outlet for their loans. You have essentially one whole loan investor [Fannie Mae]. There has been a handful of securitization without Ginnie Maes involvement. We think our involvement will provide an efficient place for those three and others to place their loans. AA: Youve said that the HECM MBS will be an accrual coupon bond. Whats that? Is that related to a zero coupon bond? RC: In some ways, its a hybrid of a zero coupon. You could almost envision it as being a hybrid between a line of credit and a zero coupon bond. The difference between a zero coupon bond and the accrual coupon bond is that a zero coupon bond typically has a bullet payment at the end. The principal and interest are paid in one lump sum. In this instance, there would be a period of time when no cash will go to the investor because there would be no payments on the underlying mortgages. But at some point, termination events will begin to occur, i.e., the borrower passes away, moves into an assisted living facility, decides to move to a different house or hits the lottery and starts paying off her reverse mortgage. And when that cash comes in, it would be paid out to the investors on a pro-rata basis. They would see some cash flow. Until that point, the interest will just accrue and the balance of the security will just grow. AA: Just like the underlying reverse mortgage interest and principal itself. RC: That is correct. AA: The reverse mortgage industry produced more than 75,000 HECMs in the last fiscal year [2006]. From where you sit and from what you know, where do you see this production in three years? RC: Well, thats a difficult question, because right now, in the legislation, there is a cap on the number of HECMs FHA can insure250,000. There is some debate about how you compute that aggregate cap: Is it 250,000 of HECMs that have ever been originated or 250,000 that are outstanding? There is a proposal before Congress that would raise or eliminate that cap. If that legislation becomes law, we believe you will see continued growth along the lines of what weve seen in the past few years. But until that cap is removed, it is a little tricky to say. AA: Would Ginnie Mae be working to make sure that bill becomes law? It passed in the House. With the new configuration of Congress, what do you think? RC: Ginnie Mae has expressed support for S 3535 [Expanding American Homeownership Act of 2006]. We cannot lobby Congress to pass the bill, nor do we have a congressional relations staff. So I dont have any educated opinion on the likelihood of its passing. You might be able to get a good briefing from the FHA folks at HUD. They have folks who are working on this all the time and they may be able to give you an educated answer to that. AA: What would you say to traditional forward mortgage lenders and brokers who may still be reluctant to seize the historic residential mortgage lending opportunities reverse mortgages present? Obviously, you have seen these opportunities; that is why you have taken the steps you announced on Oct. 17 at the National Press Club. RC: I would tell them to take some time to look at the growth rate of this product and take time to look at the demographic changes that are coming in the marketplace, where the population is aging at a fairly rapid clip. And when you look at those two factors together, it makes a fairly compelling case that if you dont get involved in reverse mortgages, you are going to miss a substantial opportunity. AA: Amen, I couldnt agree more. Thats essentially the case Ive been making through this column for almost five years now. Do you have any closing comments? RC: We at Ginnie Mae are very excited about this new product. We are working feverishly to get in place all the things that are necessary to get it done in 2007. AA: Thank you, Rob. Atare E. Agbamu, CRMS is president of ThinkReverse LLC, a reverse mortgage training and consulting firm based in the Twin Cities and is a consultant with Credo Mortgage. Atare is regarded as an emerging authority on reverse mortgages and is frequently consulted by financial professionals and families across America. His reverse mortgage interviews have been Web cast on MortgageMag Live! He can be reached by phone at (651) 389-1105 or e-mail atare@thinkreverse.com.