Investors are concerned with the secondary market impact of mortgage lenders aggressively targeting servicemembers and military veterans for quick and potentially risky refinances of their mortgages, according to SIFMA, a prominent secondary market trade group.
SIFMA voiced its concerns in a letter sent Wednesday to Ginnie Mae, which recently launched an investigation and a task force with the Department of Veterans Affairs to review a rise in rapid refinances among VA loans.
In the letter, SIFMA President and CEO Kenneth Bentsen said that the group and its members support the Ginnie Mae and VA efforts to address the issue because investors have already seen the down-the-line impact on mortgage-backed securities.
“We are concerned that these activities negatively impact VA borrowers and believe they have negatively impacted the mutual funds, 401k plans, and other savers invested in Ginnie Mae MBS,” Bentsen said in a statement. “We also support Ginnie Mae’s efforts to police the users of the program to ensure that Ginnie Mae and the market understand why significant variations in loan performance occur, and to ensure that actions that harm consumers or the liquidity of the MBS market are stopped as soon as is reasonably possible.”
In the letter, Bentsen said that research from SIFMA’s members found that some borrowers are being put into higher interest rate loans and quickly refinanced into lower interest rate loans.
“It may be the case that pricing and other criteria in the program create an incentive for this rapid refinancing, sometimes with less regard than deserved for the benefits to the borrower,” Bentsen writes in the letter.
“What is clear is that the mutual funds, 401k plans, and other savers invested in Ginnie Mae MBS have borne the cost of this behavior,” Bentsen continues. “Ultimately, it harms all borrowers whose loans are funded by the Ginnie Mae MBS programs – if the cost of funding loans through Ginnie Mae MBS increases, the cost of mortgage loans increases for FHA and RHS borrowers, in addition to VA borrowers.”
When Ginnie Mae launched its investigation into the rapid refinancing, Michael Bright, the acting president and chief operations officer of Ginnie Mae, said that the agency first noticed these issues last year and issued policies designed to address them.
At the time, Bright said that the agency put in new standards that limited the delivery of “streamline refinance” loans into standard Ginnie MBS until six consecutive monthly payments were made on the initial loan.
“Effectively, this means that an originator cannot do a quick refinance of a loan and deliver it into a standard Ginnie Mae security until the borrower has made six months of payments,” Bright said in September.
But as Bright noted then, some lenders and servicers are waiting until six months and one day after origination and then originating a refinance.
Bentsen said that SIFMA’s members have seen similar issues.
The (original guidelines issued by Ginnie Mae) helped stem the rapidity of the spike in prepayments in the TBA market by pushing the activity down the line so that it now occurs immediately after the 6-month window has expired,” Bentsen writes. “Further, some of this activity may simply have shifted into the Custom pool market. More work needs to be done to address this issue at a fundamental level.”
That’s why SIFMA supports the Ginnie Mae and VA efforts in this matter.
“SIFMA members strongly support efforts by Ginnie Mae to police the users of the program to ensure that Ginnie Mae and the market understand why significant variations in loan performance occur, and to ensure that actions that harm consumers or the liquidity of the MBS market are stopped as soon as is reasonably possible,” Bentsen concluded. “We hope that Ginnie Mae and VA are able to work together to quickly address these problems.”