A mortgage that is more than 60 days late might seem like an automatic disqualification for inclusion into a government-backed security. However, until last week, servicers were able to pool such loans into securities backed by the Ginnie Mae.
Now the agency has issued a memo informing issuers that they cannot pool loans that are delinquent by more than the monthly installment of principal and interest that is due on the issue date.
Fortunately for Ginnie Mae, issuers have not been taking advantage of the opportunity to dump delinquent loans. A Ginnie Mae review spotted fewer than 100 loans more than 60 days late that were put into pools sponsored by the agency within the last year.
"It was not something that was being abused," said Theodore W. Tozer, president of Ginnie Mae. "We were just closing a loophole."
The memo raised eyebrows slightly among some observers.
"Maybe the biggest predictor of loss on a loan is a first payment default, so if a loan has already been delinquent by more than one or two payments you really don't want that in a security," said Joe Garrett at the consulting firm, Garrett Watts & Co. "Back in the 1980s, if a loan had a delinquency, it couldn't go into any kind of security, Fannie Mae or Ginnie Mae."
Some see Ginnie Mae's rule tightening as a preemptive way to spot problem loan modifications before they turn into liabilities.
"Ginnie Mae has been pooling a lot of reperforming loans into their new issuance," said Wei Ang Lee, MBS analyst at Barclays Capital. "Those loans could conceivably be delinquent because, let's say they were just modified and put into a newly issued pool — they could become delinquent in the first month."
However, Ginnie Mae is no longer taking any chances. "A person has to be brought current whether it is a modification or a brand-new loan," Tozer said. "We expect the loans in the Ginnie Mae pool to be good quality."