Two significant developments are currently underway that could potentially reshape the Ginnie Mae supply landscape, according to a recent report by Credit Suisse. The first - an Internal Revenue Service ruling last month denying tax-exempt status to seller-funded downpayment assistance programs - could lower the supply. By contrast, the second, HR 5121, a piece of legislation in Congress aimed at expanding Federal Housing Authority's (FHA) ability to make loans, could potentially increase GNMA volume.
With the two developments moving in completely opposite directions, the question that inevitably arises is which of the two will be the stronger force. "We continue to argue that the IRS ruling is likely to have limited impact due to expected delays in implementation," Credit Suisse analysts said, adding that the prospects of HR 5121's enactment into law by year-end have increased sharply given the recent passing of its key elements as part of the U.S. Department of Housing and Urban Development Appropriations Bill.
Analysts estimate that seller-funded, down-payment assistance affects approximately 8% of GNMA issuance, and an 8% reduction would still leave GNMA net issuance close to flat based on recent trends. The implementation is likely to be slow for two reasons. For one, the IRS is reviewing roughly 185 programs, which continue to operate during the review process. Also, large programs are likely to appeal any unfavorable result in court.
As for the bill itself, HR 5121 expands the FHA's ability to make loans by increasing loan limits from the current range of 48% to 87% of the conforming limit to a range of 65% to 100%. This eliminates the 3% down-payment requirement and allows the Agency to charge risk-based insurance premiums. The House of Representatives has approved these provisions as part of the HUD Appropriations Bill resulting in the effects of the IRS ruling possibly becoming moot.
Looking ahead, "this has the potential to increase dramatically the supply of GNMA-eligible loans by expanding FHA financing to prime borrowers if FHA is allowed to make loans to such borrowers without charging an insurance premium," analysts said.
Analysts said the bill could become law in October if reviewed independently, or by December or January, if it remains part of the Appropriations Bill.
In other related GNMA news, on July 5 the Agency's new XMBS (excess servicing MBS) program will allow servicers to securitize excess servicing on GNMA II fixed-rate pools.
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