Ginnie Mae seizes bankrupt Reverse Mortgage Funding's servicing

Ginnie Mae, an arm of the Department of Housing and Urban Development, has taken possession of servicing for the bankrupt Reverse Mortgage Funding's loans, the government bond insurer has confirmed.

First reported by Institutional Risk Analyst, citing court documents, the Ginnie's seizure is the outcome of previously reported negotiations with several parties, including the bond insurer, over the assets. 

"The transfer of servicing for RMF loans should have minimal direct impact on affected borrowers," Ginnie Mae President Alanna McCargo said in a statement.

"Borrowers will receive a notification about the transfer of servicing as required by law, but that will not affect the payment schedule and borrowers should expect to continue to receive payments as usual," she added.

McCargo also reaffirmed the U.S. government's "full faith and credit" pledge to ensure the borrower payments from the government-backed loans in Ginnie Mae's mortgage-backed securities, which servicers are responsible for, are distributed to bondholders on a timely basis.

Fannie Mae also has seized some of RMF's assets, which came from the government-sponsored enterprise's small reverse mortgage program, according to IRA's Chris Whalen, an independent analyst who has consulted for Ocwen, worked for Kroll Bond Ratings Agency and is a regular op-ed columnist for this publication.

Fannie, a government-sponsored enterprise and a major investor in the broader mortgage market, has not purchased any reverse mortgages since 2010 and has less than 3,000 serviced by RMF. The bankrupt company already relies on a subservicer to handle the operational responsibilities for these loans.

Both Fannie and Ginnie have rules aimed at ensuring counterparty strength to stave off situations like this, but such contingencies still do occur and aren't completely unexpected as a result of the contraction in the mortgage industry that has followed the Federal Reserve's rate hikes in the past year. 

"They've prepared for an event like this in a market where volumes contract," said David Battany, executive vice president, capital markets, Guild Mortgage. Battany said he had no direct knowledge of the current situation at deadline, but was somewhat familiar with the history of similar failures and their impact on the secondary market.

What makes the current circumstance unusual is the fact that it involves reverse mortgages — specialized products aimed at allowing senior borrowers to withdraw cash from their homes while still living in them as they age — and the fact the servicing reportedly was seized, not sold.

"The surprising part is usually a company that owns a servicing portfolio has an incentive… to sell," said Battany, noting that the market in general hasn't been as strong as it was earlier in the year.

Reverse mortgages from a distressed company are a particularly niche product. Also the number of companies that service or subservice reverse mortgages is relatively small. One of them, Celink, is RMF's largest debtor.

The transfer of RMF's servicing will be a key test for McCargo as it marks the first major counterparty failure she's had to contend with.

RMF was ranked the largest issuer of securitized Home Equity Conversion Mortgages in 2021, according to data from New View Advisors and the National Association of Reverse Mortgage Lenders. However, that was in part because it had acquired a HECM mortgage-backed securities portfolio from another large lender, American Advisors Group. In an Bankrate analysis of 2021 Home Mortgage Disclosure Act data, American Advisors Group was named the top reverse mortgage lender and RMF ranked third.

Whenever sizable failures occur, they tend to be heavily considered in future policy at government-related housing agencies.

In that light, it will be interesting to see whether the experience factors into some tension Ginnie has been experiencing with the industry over a risk-based, nonbank capital rule it plans to implement at year-end 2024. That rule is punitive for servicing and treats it as a high-risk asset.

The RMF failure also could have some bearing on the view of reverse mortgages at the Federal Housing Administration, which insures HECMs at the loan level. 

The administration has taken losses linked to the loans in the past, and some critics have lobbied for the HECM book to be separated from other mortgages.  

More recently, however, the administration has instituted several reforms aimed at improving HECM performance and the insurance fund's overall finances have been strong, albeit possibly in part because delinquencies across the board have been historically low. The reforms' strength may be tested if a recession that some economists have been forecasting comes to pass.

Also complicating the landscape for reverse mortgages recently has been the transition away from LIBOR to a successor rate. LIBOR has been a more commonly used index in the reverse mortgage market than in the market for more mainstream home loans.