This week Ginnie Mae proposed a change to its general buyout policy.
A key component would be to allow partial payments to advance rather than reset the borrower’s delinquency status, according to Sarah Hu and Ashley Gam of Royal Bank of Scotland (RBS).
Under the current policy, Ginnie Mae issuers may buy out delinquent loans only if the borrower fails to make any payment for three months in a row.
However, under the new proposal, the issuer can repurchase loans once the borrower misses three payments, but they do not have to be consecutive.
"Therefore, non-continuous 90-days delinquent loans, which are not eligible for buyouts under the current policy, would be eligible for repurchase by Ginnie Mae issuers under the new proposal," the RBS (RBS) report explained.
The new proposal could increase buyout activity, although the implementation date of change has not been discussed.
Nonetheless, the magnitude of increase is hard to quantify as Ginnie Mae has not made its loan-level credit performance data available. Consequently, it would be challenging to examine any type of borrower patterns and quantify the buyout activity that is a result from non-continuous delinquencies, RBS noted.
RBS developed various examples to compare Ginnie Mae buy-out scenarios under the current and new policy.
The strategists found that with no payment that the loan would be eligible for buyout under both current and new buyout policies.
"Since there are no payments made in January, February and March, the issuer may purchase the loan from the pool on or after April 11," the report noted.
However, with partial payment, the loan does not meet the current buyout requirement, but is eligible for repurchase under the proposed policy.
Under the proposed policy, partial payments would continue to contribute to the missed payment count until the borrower summed to a full payment. This contrast with the current policy, which states that any payment – partial or full – resets the borrower’s delinquency status, Hu and Ham explained.
"Bottom line: Given that Ginnie Mae buyouts are optional for servicers, buyout activity is not only dictated by Ginnie Mae buyout policy, but also by the servicers decision," the analysts concluded.