Conceptually speaking, packing thousands of modified Federal Housing Administration (FHA) loans into Ginnie Mae pools should reduce prepayment speeds. In fact, that’s what some Wall Street dealers were counting on, but it appears they bet the wrong way, and their securitization strategy backfired.
Prepayments jumped because of high redefault rates on FHA-insured single-family loans.
The incidence of redefaults on modified FHA loans now hovers around 25% to 35%, and some Wall Street analysts believe it may be higher.
FHA officials have not responded to requests for more detailed redefault information.
The jump in prepayments surprised Ginnie investors.
Soon enough, agency officials began talking to MBS issuers about their high prepayment speeds.
“We found that some lenders were being encouraged by dealers to do 100% loan modification pools,” said Ginnie Mae president Theodore Tozer.
The dealers were “were paying up” for pools of modified loans, he said, on the assumption borrowers with newly modified loans couldn’t refinance again.
Instead of prohibiting such pooling practices, the secondary market agency has decided to provide mortgage-backed securities investors with new information about the percentage of modified single-family mortgages in Ginnie pools.
“Starting in mid-November, investors will able to go to Ginnie Mae’s website and see the concentrations of modified loans in particular pools,” Tozer told National Mortgage News.
The new disclosures will provide investors with not only the percentage of modified loans, but percentages on purchase and refi mortgages in the pools.
The agency wants this information to be available on Bloomberg “boxes” and in other outlets by February.
Servicers modified 150,600 FHA-insured loans in fiscal year 2010, which ended Sept. 30, an increase of 80% from the prior fiscal year.
Ginnie Mae does not have any restrictions on the inclusion of modified loans in its pools. Ginnie Mae issuers and servicers are allowed to buy back defaulted Federal Housing Administration loans, modify them, and put them back into a new pool.
If the loan defaults again, the servicer can repeat this process.
Redefaults are expensive for FHA and the agency is working with its servicers to modify loans that are sustainable—not just postponing the foreclosure for six months, Tozer said.
“Reperformance is getting better,” he said. “The (redefault) numbers are coming down to 25% or so.”
He noted that it was a lot higher in the past.
“From that standpoint, the investors should feel better that modified loans going into pools will be a lot better than they were a year or so ago,” Tozer said.