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Ginnie Mae Buybacks Cause JPMorgan REO Assets to Nearly Triple

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The value of JPMorgan Chase's (JPM) real estate owned (REO) assets — insured by government agencies — nearly tripled since Q209, due to a large increase in the rate of mortgage buybacks from Ginnie Mae mortgage-backed securities (MBS), the bank confirmed to HousingWire this week. JPMorgan released its Q210 earnings last Thursday, and many reports on the news highlighted the bank's $4.8bn in net income. In addition to the billions in profit — up nearly 78% from Q209 — JPMorgan said it slashed its loan losses company-wide by $1.5bn, the result of declining charge-offs and delinquencies. JPMorgan's primary financial disclosure did not include specifics regarding its REO holdings. Even the supplemental report the bank released the same day only makes mention of the Ginnie Mae buybacks in a footnote accompanying data on the bank's nonperforming assets. When JPMorgan buys back the loan, the investor pool still gets paid the remaining principal balance, called the RPB. The investment bank fronts that money. But as HousingWire's sister publication, REO Insider, first reported last week, in that footnote, JPMorgan said the value of its government-backed REO was $1.4bn in Q210, nearly three times the reported value in Q209, $508m. The $1.4bn value is nearly double the value reported in Q110, $707m. In addition, JPMorgan said the value of nonaccruing mortgages insured by US government agencies was up 140% from Q209, at $10.1bn in Q210 compared to $4.2bn one year ago. Nonaccruing mortgages are those that are late and no longer accruing interest. That volume is down, however, from $10.5bn in Q110, JPMorgan said in the financial supplement. There are a number of reasons that could contribute to the increase in the value of the REO. Increased property prices would contribute to a rise in the value. New US accounting rules implemented earlier this year require banks to move certain risk-bearing assets away from specially created investment entities and onto their balance sheets. But after repeated requests for comment, a spokesperson for JPMorgan confirmed the increase was in fact due to buybacks out of Ginnie Mae MBS. "These are buybacks out of the GNMA securitizations," the spokesperson said in an e-mail. The surge in buybacks may be the result of increased delinquencies and defaults of government-backed mortgages. According to the Mortgage Bankers Association Q110 national delinquency survey, the rate of past due Federal Housing Administration (FHA) mortgages in the US increased from 12.23% of all FHA mortgages in Q106 to 13.15% at the end of Q110. In that pool of past due loans, the foreclosure inventory has increased 80% since Q106. In addition, the rate of mortgages either 90 or more days past due or in foreclosure — what the MBA collective refers to as "seriously delinquent" — increased by two-thirds over the same period, 9.1% in Q110, up from 5.48% in Q106. The rise of FHA delinquencies and foreclosures industry-wide may be a contributor to the tripling in JPMorgan's REO value. But a policy change created in October to accommodate the FHA's version of the Making Home Affordable Program (HAMP) may also have a hand in the rise of nonaccruing mortgages repurchased from Ginnie Mae MBS. To accommodate the FHA's version of the Making Home Affordable Modification Program (HAMP) — which provides government incentives to lenders and investors that agree to modify distressed borrowers' mortgages — Ginnie changed its policy to allow issuers to repurchase mortgages from a Ginnie MBS pool if the borrower is approved for a FHA HAMP trial modification. For all mortgage types, JPMorgan said in the quarterly report that its offered borrowers 880,000 modifications and 245,000 have been approved since the beginning of 2009. According to the latest numbers released by the Treasury Department, JPMorgan led all of the big four banks in permanent HAMP modifications, converting 54,722 to permanent status through the month of June. The JPMorgan spokesperson declined to comment on if the volume or amount of the mortgage buybacks are related to the FHA HAMP program, only noting that: "In general, banks buy back mortgages from GNMA securitizations so they do not need to continue to advance interest. The banks will then work the loans through resolution." Ginnie Mae is a government program that guarantees certain MBS where the collateral is mortgages originated through government insurance programs. The largest of these is the FHA program. The Department of Veterans Affairs (VA), the US Department of Agriculture (USDA) and the Department of Housing and Urban Development's (HUD) Office of Public and Indian Housing (PIH) also administer mortgage programs. Both Ginnie Mae issuance and FHA mortgage originations have skyrocketed since the decline of private label mortgage industry began in 2007. Ginnie does not buy or sell mortgages, nor does it issue securitizations. Instead it acts as a backstop to the MBS, guaranteeing the timely payments of interest and principal to investors with the full faith and credit of the US government. According to Ginnie Mae guidelines published in October 2009, a Ginnie Mae MBS issuer is required to maintain delinquency rates below certain thresholds. The rates are based on the number of delinquent and defaulted mortgages in the MBS pool, and vary depending on the number of loans in the security. The penalties for failing to maintain acceptable delinquency rates range from denial of future Ginnie Mae backing for MBS deals, fines, or removal from the Ginnie issuer program. To maintain delinquency rates below the threshold, an issuer is allowed to buyback a loan once the borrower misses three monthly mortgage payments. After a bank repurchases mortgages out of a Ginnie MBS, the lender can modify the delinquent loan for repackaging in a new Ginnie MBS deal. Additionally, should a mortgage be deemed "defective" — when the government guarantee of the loan is either refused or withdrawn, or when the loan's underwriting does not meet standards — the issuer is required to buyback the loan. In recently issued Ginnie MBS, the defective loan can be substituted with Ginnie approval on a case-by-case basis. Write to Austin Kilgore. The author held no relevant investments.

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