MBA Letter Asks HUD to Expand Ginnie Mae Anti-Churning Provisions
In comments submitted to HUD on July 12, the Mortgage Bankers Association said while it supported HUD’s assessment of the unaltered guaranty on existing Ginnie Mae mortgage-backed securities under the Economic Growth, Regulatory Relief and Consumer Protection Act, it strongly disagreed with the HUD interpretation regarding “orphaned” VA loans.
The interpretive rule clarifies that the guaranty on existing Ginnie Mae MBS is unaffected by the legislation, but also confirms HUD’s determination that valid VA-guaranteed refinances that were in process or closed prior to the enactment of the legislation, but which do not meet the new seasoning requirements, are not eligible for Ginnie Mae pooling.
MBA Senior Vice President of Residential Policy and Member Engagement Pete Mills told HUD that its determination to declare ineligible Multiclass securities that do not meet the Department’s new seasoning requirements is “not supported by congressional intent, practical applications in the mortgage market or the considerations that led to HUD’s determination regarding Multiclass Securities.”
HUD recently published an interpretive rule regarding Section 309 of the Act, in which it determined that MBS guaranteed by Ginnie Mae prior to enactment of the Act are unaffected by the Act, and further that Ginnie Mae is not prohibited from guaranteeing Multiclass Securities for which the trust assets consist of interests in prior-issued Ginnie Mae-guaranteed certificates with underlying mortgage loans that may not comply with the new seasoning requirements contained in the Act.
MBA agreed with that interpretation. However, it disagreed with HUD’s determination that mortgage loans already in process or closed at the time of the Act, but which do not meet the new seasoning requirements contained in the Act, are ineligible to serve as collateral for Ginnie Mae MBS. MBA noted in the interpretive rule, HUD argues that the specific statutory language in section 309 of the Act should be construed to apply only to MBS–not Multiclass Securities. MBA said this argument is largely predicated on the narrow reference to a security that is “backed by a mortgage” rather than the broader reference in the Ginnie Mae Charter to securities that are “backed by a trust or pool composed of mortgages.” Further, as is also noted in the interpretive rule, the Ginnie Mae Charter itself makes a distinction between securities “backed by mortgages” and securities “backed by a trust or pool of securities or notes guaranteed by [Ginnie Mae].”
MBA said this distinction is indeed critical, as it is well understood to represent the difference between MBS and Multiclass Securities. Because the statutory language uses nearly identical phrasing to the description of MBS found in the Ginnie Mae Charter, it is natural and appropriate to conclude that the relevant statutory provision is intended to apply only to MBS. Additionally, HUD argues that the use of “MBS” rather than “Multiclass Securities” in other portions of section 309 of the Act provides evidence that the relevant statutory provision is meant to solely reference MBS.
“This argument is compelling and further supports the determination made by HUD that Ginnie Mae is not prohibited from guaranteeing Multiclass Securities, even if the underlying securities are backed by mortgage loans that may not comply with the new seasoning requirements contained in the Act,” MBA said.
MBA said HUD’s narrow interpretation fails to advance the legislative aim of the Act. It said while the Act should be interpreted to apply these seasoning requirements only to MBS, it is far from apparent that “any refinanced VA mortgage loan that does not meet [these] requirements is ineligible to serve as collateral for Ginnie Mae MBS,” as HUD argues in the interpretive rule. As noted by HUD:
1. The purpose of the statute is “to protect both veterans and investors by discouraging the unfair lending practice of ‘churning;'”
2. Prohibiting Ginnie Mae from guaranteeing Multiclass Securities containing MBS guaranteed prior to the Act would not further this purpose because doing so “can have no impact on lender behavior”; and
3. Therefore, applying the statute to prohibit inclusion of prior-issued MBS in Multiclass securities “does not advance the legislative aim” of the statute.
“MBA strongly believes the same rationale can and should be applied to individual loans that were in process, closed, or funded prior to the Act,” MBA said. “While these loans may not have been sold into the secondary market via Ginnie Mae MBS by the time of the Act, the relevant action–the processing of the loan–had taken place prior to the Act. These loans maintain a valid VA guaranty, and prohibiting their inclusion in Ginnie Mae MBS does not help the veteran, as the refinance transaction has already been consummated, nor does it help the investor, as the original loan has already been paid off due to the refinance. And with respect to these loans, lender behavior cannot be influenced because the behavior being targeted by the statute has already taken place. Therefore, based on the arguments made in the interpretive rule, HUD’s determination results in an outcome that does not advance the legislative aim of the statute.”
MBA asserted not only does the outcome of HUD’s determination fail to advance the legislative aim of the statute, it also directly frustrates the purpose of the statute. “By prohibiting a subset of VA-guaranteed refinances from serving as collateral for Ginnie Mae MBS, HUD’s determination effectively ‘orphans’ these loans, reducing their liquidity and lowering their market value,” the letter said. “As such, the lenders that originated these loans in accordance with the VA and Ginnie Mae requirements in place at the time will likely take losses, which in some cases may be substantial.”
Furthermore, MBA said in arriving at its determination regarding Multiclass Securities, HUD notes the potential for adverse effects on veterans, as prohibiting the Ginnie Mae guaranty of certain Multiclass Securities would “have a negative impact on the liquidity of the Multiclass Securities market, driving up VA mortgage rates and restricting the availability of the VA mortgage loans to the very veterans that the statute was intended to protect.”
“The orphaning of VA-guaranteed refinances, however, has already threatened lender confidence in the VA mortgage loan program and the Ginnie Mae execution, and could result in some lenders choosing to exit their VA business lines,” MBA said. “It is possible that some lenders with substantial exposure to the orphaned loans could potentially be forced out of business entirely. This outcome would likely result in fewer choices and higher mortgage rates for veterans, frustrating the purpose of the statute in much the same way as HUD posits would be the case with respect to a prohibition on the guaranty of certain Multiclass Securities.”
MBA recommended to limit this market disruption, better adhere to the reasonable understanding of congressional intent and more consistently apply the arguments made with respect to Multiclass Securities in the interpretive rule, that HUD reconsider its determination regarding the eligibility of VA-guaranteed refinances that were in process or closed at the time of the Act to serve as collateral for Ginnie Mae MBS. Specfically, MBA Said HUD should follow the precedent set by VA in implementing section 309 of the Act, which would apply the loan seasoning requirements of section 309(b) as a necessary condition to obtain the Ginnie Mae guaranty for MBS backed by VA refinances with applications taken on or after May 25.
“Such an interpretation would allow Ginnie Mae to more sensibly protect veterans and investors in accordance with the purpose of the statute,” MBA said.
