FHA and Ginnie Mae seek to preserve homeowner equity and, boost investor confidence
The U.S. Department of Housing and Urban Development (HUD) today announced joint policy actions designed to reduce risk associated with cash-out refinance lending. The changes preserve homeowners’ ability to convert home equity to cash via a government-sponsored mortgage but also improves the risk profile of HUD’s housing finance programs.
To address these concerns, the Federal Housing Administration (FHA) will lower its maximum loan-to-value (LTV) requirements for cash-out refinance transactions from 85 percent to 80 percent. This policy change will be effective for loans with case numbers assigned on or after September 1, 2019 and aligns with the maximum cash-out LTV allowed by the Government Sponsored Enterprises (GSEs). Read FHA’s mortgagee letter.
Meanwhile, the Government National Mortgage Association (Ginnie Mae) is taking further action to manage risks associated with ‘loan churning’ among mortgages insured by the Department of Veterans Affairs (VA). Rapid, serial refinancing has proven to deplete home equity and wealth for veterans with VA-insured mortgages and harmed investor confidence in mortgage-backed securities (MBS) that Ginnie Mae guarantees. Read Ginnie Mae’s press release.
“We are taking another important step to support sustainable homeownership that builds wealth for families,” said Federal Housing Commissioner Brian Montgomery. “This is a prudent measure to make certain that we protect and preserve the home equity borrowers are building for their futures and guard against taxpayer losses from the FHA program.”
“Today’s announcement underscores Ginnie Mae’s commitment to ensuring the agency’s policies enable homeowners to borrow prudently, utilizing the government-guaranteed mortgage market” said Ginnie Mae Acting President, Maren Kasper, “Additionally, this policy provides global investors with increased certainty in the performance of the Ginnie Mae security, which ultimately lowers mortgage rates for all borrowers served by our program.”
FHA – Prior to the housing recession a decade ago, borrowers increasingly turned to cash-out refinances during a period of home price appreciation. When home prices declined in the wake of the housing collapse, many homeowners found themselves with negative equity, forcing many into foreclosure. FHA last adjusted the maximum LTV on cash-out refinances from 95 percent to 85 percent in 2009 in response to the weakening housing market and has been closely monitoring the risk associated with cash-out refinances.
According to FHA’s latest annual report to Congress, cash-out refinances continue to represent a large and growing segment (64 percent) of all FHA-insured refinance transactions and accounted for 15 percent of all forward mortgage endorsements. This increasing share of cash-out refinances is attributed to recent home prices increases and the decline of other forms of refinance activity. This further adjustment to its maximum LTV requirements will permit FHA to mitigate this risk and, importantly, preserve FHA-insured borrowers’ wealth. Today’s announcement also aligns the FHA’s maximum LTV requirements with those of the GSEs, Fannie Mae and Freddie Mac.
GINNIE MAE – The Ginnie Mae II Multi-Issuer Program (GII MIP) represents nearly 90 percent of the agency’s mortgage-backed security (MBS) issuance. Strong market acceptance of the GII MIP has been crucial to enabling Ginnie Mae to fulfill its mission of facilitating low-cost financing for American homeowners and the federal housing finance programs it’s intended to serve. Ginnie Mae is vigilant about any trend that impairs the integrity of the security.
Today’s policy announcement Ginnie Mae outlines revisions to the pooling eligibility requirements applicable to all VA-guaranteed refinance loans and establishes new pooling criteria for certain cash-out refinances with LTV ratios exceeding 90 percent (as outlined in the agency’s previously published Request for Information). Effective with MBS guaranteed on or after November 1, 2019, high LTV VA Cash-Out Refinance Loans (those with LTV ratios above 90 percent) are ineligible for Ginnie Mae I Single Issuer Pools and Ginnie Mae II Multiple Issuer Pools, except in cases when the loans are Permanent Financing Construction Loans (as defined in Chapter 24 of the MBS Guide).
High LTV VA Cash-Out Refinances may be pooled into Ginnie Mae II Custom Pools without restriction, provided they satisfy the seasoning and number of payment requirements detailed in Chapter 24, Part 2 § (A)(3)(d).
The actual and projected extent of loan prepayment is a primary concern of MBS investors, particularly when an above-par price has been paid for the security in which the prepayment occurs. Prepayment risk is a well-understood feature of the MBS asset class and is the subject of extensive loan-level analysis that supports the liquidity of the securities. However, for MBS security
investors, concerns arise when investment losses are borne as the result of refinance activity that appears not to correlate with economic fundamentals. Cash-out refinance programs are particularly susceptible to accelerated prepayment speeds, which is why Ginnie Mae is restricting the inclusion of such loans to custom MBS securities. This allows for greater market transparency for investors pricing Ginnie Mae securities.