On February 18, the first Ginnie Mae securitization of the Department of Agriculture's Rural Housing Service Section 538 loans came to market. Plans for this type of securitization was first reported two years ago in ASR (see ASR 03/31/03). The $3.1 million transaction was backed by apartment complex loans originated by Indiana-based lender P/R Mortgage.
Ted Foster, vice president of MBS at Ginnie Mae, said that this is the first Ginnie securitization of multi-family mortgages that was not backed by Federal Housing Authority loans, though the guarantee program for these Rural Housing Service loans is similar to that of the FHA. "This new program allows Ginnie Mae to target smaller, much more rural areas," said Foster. "These are the areas that the FHA could be less effective in."
In a memorandum to all Ginnie Mae program participants, the agency said, "This loan product will complement existing Ginnie Mae multi-family securitization products and will enhance the availability of multi-family housing for low- and moderate-income families in rural areas."
Foster said that there is $200 million budgeted for the production of Rural Housing Service loans this year, which is up from $100 million last year. He said that providing a secondary takeout for these types of mortgages would help the product's liquidity, which was formerly merely placed as whole loans or in one-off transactions with either Fannie Mae or Freddie Mac.
Before these mortgages were securitized, Ginnie Mae had to be allowed by law to securitize these types of loans. Also, adjustments had to be made so that the Rural Housing Service claims process was made similar to the FHA, helping provide investor comfort in the product, which is characterized by "layered financing." The bulk of these Rural Housing Service loans, which are typically first mortgage loans, are funded through tax credit financing and state subsidies. Ginnie Mae is allowed to cover up to 50% of the total project cost. Although even with this standard, Ginnie is expected to capture a very large part of the market for this Rural Housing Service product.
With the GNMA backing and changes to the Rural Housing Service claims process, multi-family investors could now liken the performance of Rural Housing Service mortgages to FHA loans and would likely be more open to investing in the product, said Foster. He added that the first securitization has already established a price benchmark, thus attracting interest in securitizing this collateral going forward. He expects future securitizations to be like the first deal - in the $3 million range and backed by apartment complexes in a rural area.
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