Mortgage securitizer Ginnie Mae could get hit if a proposed deadline for filing claims on FHA-insured loans goes into effect.
Laurie Goodman, the director of the Urban Institute's Housing Finance Policy Center, made this argument today in a report on a July 6 proposal by the Federal Housing Administration.
The largest mortgage insurer in the world, the FHA covers loans secured by single family and multifamily homes, including manufactured homes and hospitals.
These loans are in turn bundled into deals issued by housing agency Ginnie Mae (GNMA), which has cranked out roughly $300 billion in the first three quarters of 2015 fiscal year. (See further below for GNMA issuance figures)
The FHA is proposing that a servicer with a defaulted FHA-insured loan cannot file a claim beyond 12 months after a period known as the “reasonable diligence time frame” (RDT). The RDT begins on the date of a loan default and varies from state to state. Under the proposal, a servicer that doesn’t file within the timeframe would lose the FHA insurance.
The proposal sets other deadlines as well, such as one of three months for properties acquired through foreclosure that meet certain criteria.
Goodman said that the proposal could end up forcing GNMA to cover losses on securitized defaulted loans that have lost their insurance because the corresponding servicer didn’t meet the deadline. In such an event, the servicer may not be able to cover the loss, and in the absence of the FHA insurance, the costs are shunted over to GNMA.
The rule change would also spell trouble for transferring servicing.
GNMA has to ability to transfer the mortgage servicing rights (MSRs) from a troubled servicer to another one.
If the transferred loans are in danger of losing their FHA insurance, then GNMA would probably have to pony up to compensate the transferee for taken them on.
“These problems can feed on each other,” Goodman wrote. “Originators with a fair number of loans that will lose their insurance are more apt to have liquidity and solvency issues.”
Under current rules, servicers do not face a deadline for filing a claim.
Goodman said they typically file within a couple of months of the foreclosure sale, although some wait to file in bulk.
“The delay makes it harder for the FHA to project the state of the Mutual Mortgage Insurance Fund” Goodman wrote.
Hence the FHA’s desire to set a limit.
But the agency’s stats show how tough the deadline would be for many of those servicing the loans it insures.
Goodman said that on average it took 31.75 months from default to claim for loans liquidating in May 2015. In 48 of 51 states, the average exceeded the proposed deadline.
Connecticut, Florida, New Jersey and New York are among the states with the longest timelines. Loans in those states are especially difficult to liquidate.
Goodman sees another downside to the proposed 12-month-plus-RDT deadline: a disincentive for servicers to perform late-stage loan modifications for borrowers in distress.
Her solution to the problem faced by the FHA is to impose a financial penalty that would reflect the FHA’s costs if a lender misses a “realistic deadline.”