A new policy on the repurchase of modified loans was released by the Government National Mortgage Association.
The new policy enables the repurchase of a modified loan from Ginnie Mae pools once the borrower has successfully completed a three-month trial payment period, the Washington, D.C.-based company said in a bulletin Friday.
The move follows the Federal Housing Administration’s revision to its trial-payment requirement on modified loans. The new FHA policy requires the completion of the trial period on high-risk loans that are being modified outside of the Home Affordable Modification Program.
“This change aligns Ginnie Mae’s repurchase policy for the Federal Housing Administration non-Home Affordable Modification Program high-risk loans with the current policy for FHA-HAMP loans,” the notice stated.
Issuers can re-pool newly modified loans into mortgage-backed securities.
Ted Tozer, president of the government-owned company, explained in the announcement that FHA loan performance data indicates many modified loans are at risk of re-default.
In fact, more than half of non-HAMP re-defaults during fiscal 2010 were for high-risk borrowers. The majority of the re-defaults occurred within three months of when the modifications with no trial-payment period were made permanent.
The new requirement on high-risk modifications is expected to reduce re-defaults since the defaults would likely happen during the required trial period. In turn, this should help avoid placing loans that are most likely to re-default into Ginnie MBS.
“Given the investor concerns about pre-payment speeds, working with FHA to create this trial modification initiative was clearly in the best interest of borrowers, issuers and investors,” Tozer stated.
The new policy also applies to loans insured or guaranteed by the Department of Veterans Affairs, Rural Development and the Office of Public and Indian Housing whenever the agencies require trial payment periods for permanent loan modifications.
