The Office of Inspector General for the U.S. Department of Housing and Urban Development (HUD) opened an inquiry into Ginnie Mae over the monitoring and extinguishment of Reverse Mortgage Funding (RMF) from its home equity conversion mortgage-backed securities (HMBS) program.
RMF was the fifth-largest reverse mortgage lender in the country. It was forced to file for Chapter 11 bankruptcy in the final months of 2022, caused by a “perfect storm” of market volatility, rising interest rates, and tightening Federal Reserve monetary policy, according to a report by Reverse Mortgage Daily. The 66 percent year-over-year dip in home equity conversion mortgage (HECM) loan originations and acquisitions recorded in September 2022 only worsened an already worsening liquidity issue.
Notably, RMF’s troubles escalated as it attempted to comply with a Ginnie Mae rule stating its HECM loan servicers were required to purchase loans from Ginnie Mae securitizations pools once the balance on an HECM loan was at 98 percent of the maximum underlying Federal Housing Administration (FHA) insurance-coverage amount. A servicer that fails to do so risks termination of its servicing rights.
The time for the reimbursement of these loans from the FHA, and the amount of time the servicer would have to carry the loan, can range from several months to several years. If HECMs in this situation can’t be re-securitized at a profit, risk of issues like what RMF faced becomes higher. For RMF, the issue stated in the Chapter 11 filing was it did not have sufficient capacity in its warehouse lines to fund its buyout obligations, nor the liquidity channels to address the situation.
Inspector General Rae Oliver Davis said it would be looking into Ginnie Mae’s oversight of RMF throughout the course of the relationship’s history, as well as what actions Ginne Mae took to assess and mitigate risks present by RMF. The investigation will include interviews, data gathering, and analysis of compliance with laws, regulations, policies, and procedures related to overseeing the reverse mortgage company.
“Providing oversight of Ginnie Mae’s $2.4 trillion mortgage-backed securities (MBS) portfolio is a priority for my office, and we have identified managing counterparty risk as a top management challenge for HUD,” Davis said. “Because extinguishing issuers and seizing their portfolios places significant stress on Ginnie Mae’s operations, my office has initiated an inquiry into the facts and circumstances that led to Ginnie Mae’s extinguishment of RMF from the HMBS program.”
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