Bank of America Merrill Lynch analysts said that on the surface, it would seem that the buyout policy shift announced by the Federal Housing Administration on Aug. 26 is negative for GNMA buyers.
But, they actually think that investors should see this announcement in light of the FHA Mortgagee Letter 2011-28.
Before this, servicers can buyout delinquent loans out of the pool only if a borrower had not made any payment for three straight months. This FHA new buyout policy eases this limitation and allows buyouts even if a partial payment was made in the month as part of a trial modification.
In analysts' view, the buyout policy change would not result in a rise in prepayments but rather it would cause GNMA collateral to improve because of the changes that the FHA made as part of their Mortgagee Letter 2011-28 that was issued Aug. 15.
Trial modification is currently required under most cases. Previously, three months of delinquency were needed before a loan modification could be done. No trial period was necessary for modifications other than for modification under FHA-Home Affordable Modification Program (HAMP).
They noted that the FHA-HAMP modification is the path of last resort in the FHA loan modification waterfall and is not as widely utilized compared to other loss mitigation techniques, analysts stated. They cited the Mortgagee Letter 2011-28 lets the loan modification process to start sooner and based on a wider set of criteria. It also now requires a trial modification in most cases.
Analysts pointed out that the new buyout policy is necessary to support this loan modification policy change. If a loan is being modified, then it has to be purchased from an agency pool. The current buyout policy compelled servicers to wait for the borrower to reach three months delinquency to start the loan modification process.
This is a result of the fact that a permanent loan modification can be executed only after the loan has been bought out. Currently, servicers can start loan modification sooner, although they have to wait for the trial modification to be completed before buying out a loan, analysts explained.
BofA Merrill analysts see the trial period as significantly limiting recidivism rates on modified loans that will now get re-pooled into new GNMA pools. Thus, the quality of new GNMA pools will be better, they said, because of a reduced re-default rate on modified loans. The new buyout policy will not cause a rise in buyouts either, they said.
The loans that will go through modification would have been bought out under the older rules once they became three months delinquent. In some instances, the new policy might actually increase the lag for the buyout.