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
[email protected].
