Barclays says Ginnie changes will reduce mortgage servicer costs
A new plan by Ginnie Mae will allow issuers to repurchase mortgages from its guaranteed securities if the loan completes a three-month trial modification. And according to Barclays Capital analyst Derek Chen, the initiative will alter the economics of buyouts for Ginnie Mae mortgage servicers. Ginnie offers a federal guarantee on the timely payment of interest and principal to investors in mortgage-backed securities collateralized by Federal Housing Administration and Veterans Affairs loans. In a note to clients of the investment bank, Chen said that "because FHA only reimburses the principal portion but not the interest part of the advances in cases where the loan eventually goes into foreclosure, the new rule should reduce the total costs associated with modifications for servicers." Chen added that the impact for all other related parties, namely investors, will be insignificant. Under the new arrangement, Ginnie allows loans to be bought out at the end of the trial period, rather than the previous requirement loans must accumulate three full missed payments before being eligible for buyout. Chen dismissed the argument that mortgage servicers are now incentivized to pursuer modifications more strenuously, which could potentially lead to high Ginnie pool prepayments. "Under the new rule, servicers have to commit themselves to the modification three to four months in advance -- at the start of the trial period," Chen said. "This significantly increases the probability that the modified loans will be sold below par, which implies a reduced incentive for loan modifications." Chen expects the FHA will closely monitor the redefault rate of modified loans and cross-compare among servicers, thereby reducing the likelihood servicers use modifications as a blanket loss-mitigation tool. "In other words, loans that do not need a modification are more likely to be cured with a repayment plan or partial claim, which do not require being repurchased out of the pool," he concludes. Write to Jacob Gaffney. Follow him on Twitter @jacobgaffney.