Investments

FHA policy transparency fuels Ginnie Mae modernization

Both originators and investors benefit from across-the-board upgrades

The ongoing push by the Federal Housing Administration toward additional transparency and data disclosure took another positive step toward the modernization of Ginnie Mae.

The agency released its first draft of its new single-family housing policy handbook, which comes on the heels of the updated production report introduced a couple of months ago. Ginnie Mae is the only entity that issues mortgage bonds, some using FHA-insured loans as collateral, with a government guarantee. Investors long asked for the operations to improve at the federal agency and upgrades began two years ago.

This goes hand in hand with the loan level disclosures Ginnie Mae launched this fall and in bringing policy transparency, closing the gap versus the Federal Housing Finance Agency, which oversees government-sponsored enterprises Fannie Mae and Freddie Mac.

“Our conversation this week reveals efforts toward further clarifying their underwriting guidelines to help realize their mission,” analysts at Bank of America Merrill Lynch (BAC) explained.

They added, “Forthcoming revisions will not disadvantage lenders from extending credit weaker borrowers by adjusting for credit attributes when assessing issuer performance.”

The goal of the FHA is to provide clarity to originators so that credit overlays don’t restrict credit to borrowers — specifically, first-time homebuyers with low down payment availability and borrowers with temporary credit impairment as a result of the economic downturn who are otherwise credit worthy.

The current mortgage insurance premium levels are appropriate for the credit risk profile of its underwriting book, dimming the likelihood of further increases in the near future, the FHA pointed out.

The competitive private mortgage insurance pricing of the borrowers with FICO scores more than 720 to the government-sponsored enterprises — as mortgage insurance premium increases outpaced guarantee fees — is indicative of the complementary role that the FHA seeks to play to the enterprises.

“This allows the FHA to reclaim a foothold toward expanding credit to its core borrower case, meaning those with credit scores in the high 600s to low 700 FICO credits,” BofAML analysts stated.

Additionally, this carries important implications for MIPs in case g-fees are increased again, which FHFA current acting director Ed DeMarco has noted will likely happen in the foreseeable future.

While the FHA may resist MIP increase to the extent that it doesn’t regain market share among the better credit borrowers, they agency will likely respond if the pricing gets to the point where it’s steered away from its targeted borrower cohort, BofAML argued.

Meanwhile, the FHA will extend the cutoff date for grand fathering MIPs if the FHFA extends the Home Affordable Refinance Program- cutoff date is far from certain.

The negative impact of the insurance fund from the subsidy — up to $10 billion according to BofAML estimates — will be an important deterrent in view of the ongoing concerns around FHA solvency.

However, political pressure for equal treatment of FHA borrowers would easily surpass solvency concerns, leaving open the possibility that the FHA will follow suit, BofAML analysts explained.

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