MBA securities proposal mentions HMBS 2.0 as ‘logistics template’
The Association of Mortgage Bankers (MBA) published a proposal this week Ginny Mae to develop a new mortgage securitization product that could increase the availability of private sources of capital liquidity in the market, especially during periods of stress for the U.S. economy.
Importantly, the association said the recent development of Ginnie Mae’s new, complementary Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) product – known as “HMBS 2.0” – could serve as a “logistics template” for a such product.
Proposal and inspiration
“Unlike a typical Ginnie Mae effect based on pools of insured or guaranteed residential mortgages, the Ginnie Mae [early buyout (EBO)] security would not be based on a modified pass-through structure,” the MBA said in a statement white paper which outlined the proposal. “Instead, it would be similar to Ginnie Mae HMBS (powered by FHA-insured reverse mortgage loans), where the investor receives an accrued amount at the time the loan is settled.”
The proposed product “would increase liquidity for government agencies across all economic cycles,” said MBA President and CEO Bob Broeksmit. “An EBO effect addresses the timing mismatch within Ginnie Mae’s program and helps alleviate an ongoing problem that is of concern to issuers and regulators alike.”
This partially matches some of the stated goals Ginnie Mae has offered for HMBS 2.0, from the initial announcement of its development early this year to the release of a final term sheet late last month.
HMBS 2.0 is designed to enable the acquisition of loans from an HMBS pool above the existing requirement of 98% of the maximum claim amount (MCA). This would aim to address the liquidity issues that have plagued the reverse mortgage sector due to the bankruptcy of a major lender at the end of 2022, the rise in interest rates and a steep decline in lending volume.
MBA has outlined some of its reasons for considering the existing HMBS program and HMBS 2.0 as possible paths for its new proposal.
“Ginnie Mae […] has a very recent precedent for guaranteeing securities with no monthly cash flow and uncertain maturity,” the white paper said. “The HMBS program similarly offers issuers the opportunity to purchase [HECM] taking loans from their original pool and recombining them into a new class of securities, providing operational liquidity until the issuer resolves any issue with the loan that prevents its allocability to FHA.”
Therefore, HMBS 2.0 could serve as an example for Ginnie Mae to observe.
“We believe the rollout of the new HMBS 2.0 program could provide a logistical template for Ginnie Mae personnel as they determine the conditions and criteria for a potential rollout of an EBO securitization product,” the paper said.
The trade group acknowledged that investor demand for such a product would likely be small, but that doesn’t mean it couldn’t make a difference.
“We expect this program to have a small but not insignificant trading volume, with investor profiles similar to those of investors in the HMBS program and with sufficient demand from the warehouse lending community alone to ensure the market remains liquid and viable remains when it is most needed for the economy. issuer,” MBA explains.
Reverse response: ‘You’re welcome’
When asked about the possibility of HMBS 2.0 serving as a template for the EBO proposal, New viewing advisors partner Joe Kelly said this is something his firm recently addressed one of his blog posts. It describes how the HECM/HMBS program “went from a program to eliminate to a program to emulate,” Kelly said.
The proposed MBA program shares some of the objectives and aspects of HMBS 2.0 – particularly in “providing liquidity for defaulted FHA-insured loans” – but also has necessary discrepancies due to the differences in collateral for each program.
“HMBS has the maximum claim transfer of 98%, and Ginnie Mae term mortgages do not,” Kelly said. “HECMs do not have a fixed monthly payment, so advances under the HMBS program are much less burdensome. As the white paper explains, FHA-insured term mortgages require advances of monthly scheduled principal and interest. This creates a timing mismatch that is especially problematic for loans that default.”
Based on the white paper, the mismatch in cash flow timing “has always been an inherent problem in the program, but the need for a solution is greater than ever due to the increased reliance of program participants on independent mortgage bankers (IMB). Kelly said.
While there is a similar dependence the other way around, Kelly says, the underlying question centers on why banks have largely withdrawn and what it would take to get them back into the mortgage industry.
“In the wake of the banks’ withdrawal, the mortgage finance system must increasingly rely on the chain of lenders, independent building societies and bespoke structured finance solutions,” said Kelly. “These solutions include new securitization programs such as HMBS 2.0 and the program proposed in the white paper, which otherwise seems sensible.”
In that case, if the MBA proposal was “really inspired by HMBS 2.0, then you’re welcome to the mortgage industry,” Kelly said.
