Reverse Mortgage Guide

Ginnie Mae had guaranteed reverse mortgage notes worth $116 million. So why should anyone care?

The way this works is that reverse mortgages are packaged together to create a mortgage-backed security. Investors buy such securities and then get the interest they produce and perhaps appreciation.

The importance of the Ginnie Mae announcement is that a lot of investors are running from mortgage-backed securities as fast as they can tuck their wallets into their pockets. Why? The mortgage meltdown.

But the mortgage meltdown is not impacting FHA loans to a great extent because such mortgages are ultimately guaranteed by the U.S. government. If want a nice safe mortgage-backed security you want some without subprime loans or toxic mortgages — and that means loans backed by the federal government, Fannie Mae and Freddie Mac are most in demand as financial safe havens.

The money investors pay to get mortgage-backed securities flows back to lenders. With new cash lenders can make new loans, which is good news for those looking to borrow.

The official Ginnie Mae release is below:

Ginnie Mae Guarantees First Home Equity Conversion Mortgage-Backed Security

Issuance Is First Security Backed by FHA Home Equity Conversion Mortgage Loans

Washington, DC - Today, the Government National Mortgage Association (Ginnie Mae) announced the first issuance of its new Home Equity Conversion Mortgage (HECM) Mortgage-Backed Security (HMBS). The $116 million issuance is the first-ever government-guaranteed mortgage-backed security collateralized by Federal Housing Administration (FHA) insured reverse mortgages (HECM).

Reverse mortgages allow homeowners aged 62 and over to convert home equity into cash while living at home for as long as they wish. Borrowers continue to own their homes, and do not need to make any monthly payments. Instead, they can choose to receive the funds as a lump sum, line of credit, or monthly payment. The loan comes due only when the last borrower moves out, dies, or sells the home.

“This is an important milestone in the developing reverse mortgage market,” said Thomas R. Weakland, Acting Executive Vice President of Ginnie Mae. “We believe that the HMBS, like the very first MBS guaranteed by Ginnie Mae in 1970, will spur secondary market growth and increase liquidity. This will drive down the cost of borrowing for older Americans.”

The Ginnie Mae HMBS provides the mortgage-backed securities marketplace with the only full faith and credit vehicle and the only standardized structure for the securitization of FHA-insured HECM loans. The HMBS security simplifies the current structure of reverse mortgage securitizations and maximizes value for reverse mortgage lenders and borrowers.

Many industry analysts say a robust secondary market will help facilitate the growth and affordability of reverse mortgages. The Ginnie Mae HMBS is an attractive investment vehicle that will increase liquidity by providing capital market funding sources to primary market HECM lenders, broadening distribution channels for HECM loans and expanding the investor base for the HECM product.

The HMBS will be structured as an accrual coupon pass-through bond. HMBS issuers pass through payments to investors as homeowners pay off the loan. Issuers will be able to securitize all (original and subsequent) HECM loan draws, Mortgage Insurance Premiums (MIP), and servicing and guarantee fees.

“Currently, reverse mortgage originators generally get a premium on the initial loan draw and are reimbursed by the investor dollar for dollar on subsequent draws,” said Weakland. “The ability to securitize successive draws means the originator can obtain market pricing on the entire loan amount - not just the initial draw. That’s a key value of the HMBS to lenders.”

Industry data estimates that Americans age 62 or older currently hold an estimated $4.3 trillion of home equity. In the first quarter of 2007 alone, there was a $19 billion increase in senior home equity.

“The reverse mortgage market is experiencing tremendous growth, particularly FHA-insured HECM loans,” said Robert M. Couch, General Counsel of the U.S. Department of Housing and Urban Development and former president of Ginnie Mae. “Given the current turmoil in the mortgage market, investors are eager for a relatively safe, low-risk product that is guaranteed by the full faith and credit of the U.S. Government. The Ginnie Mae HMBS is clearly the right product at the right time.”

Ginnie Mae is a wholly-owned government corporation within the U.S. Department of Housing and Urban Development. Ginnie Mae pioneered the mortgage-backed security (MBS), guaranteeing the very first security in 1970. A MBS enables a mortgage lender to aggregate and sell mortgage loans as a security to investors. Ginnie Mae securities carry the full faith and credit of the United States Government, which means that, even in difficult times, an investment in Ginnie Mae is one of the safest an investor can make.

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This entry was posted on Tuesday, November 13th, 2007 at 1:25 pm and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.