Responding to Ginnie Mae's request for suggested improvements to its MBS and Multiclass Securities Programs, The Bond Market Association last week released a statement regarding suggestions on how the agency could restructure mortgage insurance premium requirements. These fees are the amount paid by a borrower for mortgage insurance, which need to be paid upfront and annually (50 basis points) without regard to a borrower's payment history or accumulated home equity.
The BMA stated that the goals of these suggested changes are to reward and retain performing borrowers, to enhance product innovation to be more competitive versus the conventional market in serving low income borrowers, to improve the pricing and liquidity of Ginnie Mae MBS through increased disclosure and to create bonds with maturities of 10 years or less.
Michael Frenz, executive vice president at Ginnie Mae, said that the BMA's proposed changes speak to increasing Ginnie Mae market share and liquidity. However, he said that Ginnie would have to consult with the Federal Housing Authority as well as the Department of Veterans Affairs because these changes would affect the safety and soundness of their funds. He said that Ginnie Mae is doing what it can to make its program attractive to its business partners and this is why they solicited suggestions from organizations like the BMA, adding that Ginnie would be discussing the suggested changes with the Association to clarify and better understand the recommendations that were put forth.
The BMA believes Ginnie Mae should alter its insurance premium requirements for borrowers with FHA and VA insured loans, recommending the removal of the upfront insurance premium requirement for refinancers with clean payment histories and eliminating the upfront insurance premium and reducing the annual charge for refinancers whose homes are appraised with a sales price between 80% and 90% of the loan amount.
Ginnie would be more competitive if it introduced loans with features similar to those in the conventional mortgage market or if it offered loans that cater to payment sensitive borrowers - including loans with initial interest-only periods and 40-year amortization schedules, said the BMA. This would prevent the migration of borrowers to the conventional conforming or non-agency markets.
Noting that MBS investors are most comfortable with securities with a high level of collateral disclosure and performance information, the BMA is urging Ginnie to increase disclosure and provide more information on the mortgages backing its pools. Finally, the BMA also recommended that Ginnie consider ways of creating bonds with maturities of 10 years or less, which are particularly attractive to foreign investors. Shorter maturities would also make Ginnie Mae's CMO program more appealing.
"We concentrated on suggestions that were lower cost and would be easier for Ginnie Mae to implement, and on those that would have a more significant impact on the secondary market," said Nadine Cancell, vice president and assistant general counsel at the BMA. "These are merely suggestions on how to help Ginnie Mae improve its MBS program."
Art Frank, head of mortgage research at Nomura Securities International and a member of the BMA's MBS Research, Strategy and Analysis Committee, said that problem with Ginnie's current insurance premium program is that it does not give credit to house price appreciation nor reward performing borrowers. Even if the price of the home appreciates, the amortization required by Ginnie to cancel the mortgage insurance premium is based on the original value of the home and not on the property's more current, often higher value, which effectively lowers the borrower's LTV.
"A period of high price appreciation gives people an incentive to refinance to a conventional mortgage to shed the insurance premium," said Frank, adding that Ginnie borrowers whose LTVs go down to at least 80% due to appreciation can readily qualify for a conventional mortgage. So borrowers refinance out of a Ginnie loan not so much for a rate incentive but to shed the mortgage insurance premium.
Additionally, Frank also said that increased disclosure in Ginnie securities is important especially in terms of providing information on LTVs and FICO scores. Often due to streamlined refinancing, LTV data is not updated since there is no new appraisal conducted. This results in using a defaulted LTV value of 90%, which does not reflect the borrower's true state. He added that providing average and quartile FICO information as well as basing LTV data on the Housing Price Index at the time of refinancing would also be helpful.
In terms of product innovation, Frank said that for purchase mortgages, it would improve Ginnie Mae's market share if the Agency starts offering medium- to low- income borrowers more innovative products such as 40-year amortization loans and IO mortgages.
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