Ginnie Mae Moves to Crack Down on Repeated Refinancings
Ginnie Mae is taking steps to curb repeated mortgage refinancings that it says are hurting both borrowers and investors.
The government-backed firm, which promotes homeownership by guaranteeing government mortgage bonds, is considering barring some loans backed by the Department of Veterans Affairs from inclusion in its flagship bonds.
Its proposal, to be released on Friday, is aimed at stopping so-called “churning,” a practice in which lenders push borrowers to refinance their home loans over and over in a bid to boost fees to the lenders. Ginnie Mae has made churning a priority in recent years. It started taking action against individual lenders last year when their activity suggested they were pushing refis on borrowers, even when the borrowers wouldn’t benefit from it.
Ginnie Mae’s backing of government mortgage bonds gives investors certainty they will be paid, which in turn allows lenders to make mortgages at lower rates, often to first-time home buyers and veterans.
Its portfolio of outstanding bonds has ballooned in recent years and now makes up nearly a third of all agency-backed mortgage debt. That has put the firm in the position of having to more carefully police the actions of its lenders, many of which are independent firms, to preserve the flow of capital into the mortgage market.
Now, Ginnie Mae is focusing on mortgages where a borrower pulls cash out of their home during a refinancing, resulting in a loan that is more than 90% of the value of the property. The firm is seeking input from investors and others before completing the policy.
Ginnie said the proposal is being driven by the concerns of investors who buy its securities. When mortgages are refinanced at a rapid pace, the mortgage securities are paid off more quickly than expected, which means investors don’t receive the yield for as long as they wanted. Even a little bit of churning can reduce the attractiveness of an entire pool of loans by shortening the life of the bonds.
“It’s a small portion of the loans but it has an outsized impact,” said Maren Kasper, Ginnie Mae’s acting president. “Investors just don’t have the certainty they need to know they won’t get these loans in their pools.”
Ginnie has found that despite past efforts to curb churning, it remains most pronounced among VA cash-out refis where the loan to value is over 90%, according to the proposal. Some investors say the churning issue, and its impact on the bonds, has caused them to sour on Ginnie Mae debt.
“In general we tend to avoid Ginnie Maes because of it,” said John Kerschner, head of U.S. securitized products at Janus Henderson Investors. “It has caused us to have a much higher bar to invest.”
VA mortgage refinancings allow service members to pull more cash out than typical loans. Such loans can be as much as 100% of the value of the property, when including closing costs, and used to be higher until the Department of Veterans Affairs capped it in February. In conventional mortgages, cash-out refinances are typically capped at 80% of the property value, and for Federal Housing Administration loans, cash-outs are capped at 85%.
The Department of Veterans Affairs said in a statement that it would work with Ginnie Mae to make sure any changes do not negatively impact veterans’ access to credit.
In one scenario under consideration, Ginnie would still back these loans, but they would be segmented into separate securities where they would be priced according to what the market would pay for them, rather than weighing on broader pools that include mortgages from many lenders.