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Law360 (April 30, 2020, 5:47 PM EDT) --
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| John Holahan |
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| Matthew Yoon |
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| Joshua Jordon |
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| Jessica Rebarber |
All Participants Memorandum No. 20-03 summarizes the modifications made to Ginnie Mae's MBS guide, which will now provide liquidity to servicers for their pass-through obligations in certain circumstances for delinquent loans due to the ongoing COVID-19 emergency.
By way of background, on March 27, Ginnie Mae announced that it was modifying its existing disaster-related PTAP guidelines under its MBS programs in order to honor Ginnie Mae's statutory duty to timely and fully pay the principal and interest payments due to MBS holders, while minimizing disruptions occurring in the servicing industry due to the COVID-19 emergency.
These previously announced PTAP modifications resulted in the creation of PTAP/C19, specifically tailored for use during the pandemic. The specific requirements and agreements governing the PTAP/C19 are now located in Chapter 34, Part 2, Section E of the MBS guide, and Appendices XI-01A and XI-02A. All of these materials were simultaneously released and attached to APM 20-03.
Key Provisions
The PTAP/C19 program takes effect immediately upon publication of APM No. 20-03. Key provisions of PTAP/C19, as announced by APM 20-03, include:
Last-Resort Financing
Notably, Ginnie Mae reiterated that any assistance rendered under PTAP/C19 is to be considered an extraordinary measure, for use when other resources have been exhausted, and with the requirement of full repayment by the issuer plus interest.
Moreover, Ginnie Mae specifically requires that, to the extent that funding assistance is available through sources other than Ginnie Mae, the issuer first seek assistance from those sources before requesting PTAP/C19 funding.
Further, Ginnie Mae will assess whether there are sufficient grounds to expect the timely repayment of any PTAP/C19 advance. Importantly, Ginnie Mae notes that the PTAP/C19 program is not intended to address the full extent of solvency issues that an issuer might face as a result of COVID-19.
Request and Repayment Agreement
To apply for PTAP/C19 assistance, issuers must submit a request for pass-through assistance related to COVID-19 and a repayment agreement. This agreement requires specific loan-level reporting and identification of which loans the assistance will be used to advance upon, as well as the sum of other issuer funds that will be used to cover the shortfall in collections.
Issuers must include a signed statement from an officer, on the issuer's letterhead, articulating the issuer's previous efforts in obtaining private financing or other assistance for the subject shortfalls, as well as the issuer's plan for repaying any funds advanced by Ginnie Mae. Ginnie Mae may request any additional supporting documentation.
Upon review and approval, and execution of the required documentation, the funds will be deposited via automated clearing house by Ginnie Mae directly into the central principal and interest custodial account identified in the operative U.S. Housing and Urban Development Form 11709 and HUD Form 11709A for the issuer on the date the issuer submitted the request and repayment agreement.
Ginnie Mae's approval and execution of any request and repayment agreement does not constitute approval of requests for months other than the month in which the approved and executed request is submitted. Ginnie Mae noted that it will evaluate each request in the month requested, and retains sole discretion to approve or reject any request. The agreement has been incorporated into the MBS guide as Appendix XI-01A.
Master Supervisory Agreement
The PTAP/C19 assistance provided will be subject to a new master supervisory agreement, which will govern the terms of the PTAP/C19. The master supervisory agreement has been incorporated into the MBS guide as Appendix XI-02A.
Mechanics for making request and timelines: All documents required for a PTAP/C19 request must be submitted via email no earlier than the fifth business day of each month, and no later than the sixth business day of each month. The email subject line must include the issuer ID, the issuer name and the month and year of the request.
Ginnie Mae will notify the issuer in writing about its determination to approve or reject the request for assistance no later than one business day prior to the date that the corresponding monthly remittance payment is due, which may differ depending on whether the issuer requested assistance from Ginnie Mae I, Ginnie Mae II or both.
Interest Rate
The PTAP/C19 advances from Ginnie Mae will bear a fixed rate of interest, and the rate that will apply to a given month's advances will be posted on Ginnie Mae's website on the second business day of each month. As of the date of this writing, we could not locate a posted interest rate for April PTAP/C19 advances.
Events of Default
Significantly, as previously announced, neither a request for PTAP/C19 assistance nor the provision thereof, will, in and of itself, constitute an event of default under the Ginnie Mae guaranty agreement.
However, a breach of either the request and repayment agreement or the master supervisory agreement will constitute an event of default under each of (1) the master supervisory agreement and related request and repayment agreements, (2) the MBS guide, and (3) the guaranty agreement.
Subordination of Third-Party Servicing Advance Facilities
Importantly, the master supervisory agreement provides that repayment obligations owed to third parties under servicing advance facilities for loans that are identified in the request and repayment agreement and that are subject to the master supervisory agreement, are subordinate to the PTAP/C19 program advances.
Limitations on Timing for PTAP/C19 Requests
Issuers are permitted to request PTAP/C19 one time per month to cover shortfalls on the principal and interest due MBS holders for the month in which the request is made. For example, Ginnie Mae provides that PTAP/C19 requests submitted in May must relate to the funding needed for the May MBS investor remittances.
Limitations on Use of PTAP/C19 Proceeds
PTAP/C19 may only be used to cover principal and interest shortfalls on loans that are delinquent as of the date each PTAP/C19 assistance request is submitted. Notably, loans in forbearance are considered to be delinquent for this purpose. PTAP/C19 funding may not be used to cover other issuer operational or servicing costs.
Maturity Date and Repayment
The principal (i.e., the amount provided to the servicer through PTAP/C19) together with interest associated with any request and repayment agreement must be repaid in full to Ginnie Mae on the earlier of: (1) the date that is the last day of the month that is seven months from the month in which the request and repayment agreement was approved by Ginnie Mae; or (2) July 30, 2021.
Note that the issuer may prepay all or any portion of the principal, together with interest, at any time prior to maturity, without premium or penalty. Any such prepayment will be applied first to accrued interest, and then to reduction of the principal.
The principal, together with interest owed under any request and repayment agreement must be made through pay.gov in accordance with payment instructions in Chapter 6, Part 5 of the MBS guide. Upon request of the issuer and prior to the maturity date of any request and repayment agreement, Ginnie Mae may extend the corresponding maturity date for an additional term, as Ginnie Mae deems appropriate and in its sole discretion.
Restrictions on Use of Servicing/Collection Funds
Under the guaranty agreement, issuers are generally permitted to use funds in the central principal and interest custodial account to reimburse themselves for their previous advances after satisfying the payment obligations outlined in the guaranty agreement.
However, if the issuer uses the PTAP/C19 program, the issuer must use any funds in the central principal and interest custodial account resulting from proceeds received from claims filed with the federal agency insuring/guarantying the loans identified in the corresponding request and related repayment agreement(s) to repay the PTAP/C19 principal and accrued interest to Ginnie Mae.
Issuers must also use those funds to repay any additional COVID-19 principal and interest assistance provided from sources other than Ginnie Mae before using such funds for issuer reimbursements of its previous principal and interest advances.
However, the issuer is not prohibited from recovering any portion of borrower payments or insurance and guaranty claims that correspond to the issuer's loan servicing spread, as defined in Chapter 3 of the MBS guide, or using the funds associated with such recoveries from any purpose permitted under Chapter 21 of the MBS guide.
Ginnie Mae also acknowledges that the issuer, so long as it remains in good standing under the MBS program, may continue to use proceeds associated with the loans identified in the related request and repayment agreements in excess of the principal and interest due to MBS holders and the Ginnie Mae guaranty fee, to repay third party-financed servicing advances or any other such debt associated with encumbrances on the issuer's servicing income in accordance with Chapter 21 of the MBS guide.
Enhanced Financial Reporting Required
Ginnie Mae will require enhanced reporting and financial information from any issuer that seeks PTAP/C19 funding. Specifically, the issuer agrees to provide to Ginnie Mae current financial and balance sheet statements, in 30-day intervals from the date of the master supervisory agreement and for the duration thereof.
Further, the issuer agrees to provide to Ginnie Mae updated MSR valuations for its existing portfolio, in 30-day intervals from the date of the master supervisory agreement, and for the duration thereof.
New Financial Transactions and Executive Compensation Restrictions
The issuer agrees to restrict financial transactions for the duration of the master supervisory agreement, until the principal and interest are paid in full. Specifically, dividend payments, new loans to related parties, share repurchase transactions and increases to total cash compensation to executives are prohibited.
Additionally, executive compensation increases in the form of benefits, stock options, bonuses and stock are also prohibited. Finally, Ginnie Mae reserves the right to review the issuer's financial capabilities and perform evaluations of the issuer's continued program eligibility at any time.
Restrictions on Transfers
The issuer may not assign or transfer any of the pools or loan packages identified under any request and repayment agreement until all funds owed to Ginnie Mae, including principal plus interest, have been repaid in full, unless the assignment or transfer of such pools or loan packages is approved in writing by Ginnie Mae.
If Ginnie Mae approves the issuer to assign or transfer any of the pools or loan packages identified under any request and repayment agreement before the principal plus interest is repaid in full to Ginnie Mae, the issuer and the transferee issuer must execute a written assignment agreement, found in Appendix VIII-3 of the MBS guide.
Under the assignment agreement, the transferee issuer must assume any and all amounts owed and unpaid by the issuer under the applicable master supervisory agreement.
Insights
Ultimately, while the PTAP/C19 program represents an important step to help Ginnie Mae servicers weather the COVID-19 emergency and should be applauded, such relief, as detailed above, does not come free of some material strings. This includes various requirements and considerations that both servicers and their existing financing partners need to navigate and become comfortable with prior to utilizing the program.
For instance, the following items may present significant obstacles for certain issuers:
- The prerequisite need to have exhausted all available options for private financing, such that the issuer can articulate and represent to Ginnie Mae that the request for assistance is truly a last resort;
- The yet unknown rate of interest;
- Enhanced financial reporting duties and surveillance during the term of the program;
- Restrictions on financial transactions;
- Restrictions on executive compensation; and
- Restrictions on transfers.
Most glaringly, the extent to which a servicing advance lender would agree to subordinate their facility, and/or the mechanics around how such bilateral facilities would be addressed, is an open question for the market.
Further, notwithstanding the commendable efforts for Ginnie Mae servicers, it nonetheless remains paramount that parallel measures that apply both to government-sponsored entities and nonagency markets, such as federally funded and/or backed servicer advance facilities, are also implemented in the immediate future.
These additional sources of liquidity will be crucial in helping mortgage servicers withstand the impending tidal wave of delinquencies that will stress their liquidity positions, especially where borrowers enter into forbearances as mandated by applicable federal and state laws; and will allow those servicers to continue to serve their vital role in the mortgage markets.
Moreover, providing servicers with the wherewithal to make their contractually required monthly principal and interest servicing advances will help prevent further disruption to thousands of individual borrowers, which would otherwise result if frequent and large servicing transfers are required as a result of servicers that have defaulted.
It would seem particularly important to avoid the disruption of servicing transfers at a time when borrowers will be in contact with their servicers at a heightened level, including at the outset, during and upon exit from forbearance plans.
While many of the recent developments around opening such a federally funded or backed servicing advance facility appears to have devolved, at least in part, into the typical political theater, crucial time is being wasted in implementing relief for servicers.
While the ultimate level of delinquencies is unknown, given predictions for both unemployment and GDP from both government and private industry, none of which appear rosy, it appears logical that delinquencies will only increase materially in the near term as this crisis continues throughout the second quarter of 2020.
In addition, given that any such facility may take time and mechanics to implement — for example, it took Ginnie Mae two weeks from announcement to implementation for the PTAP/C19 program — taking a wait-and-see approach with respect to the definitive level of borrower delinquencies across different portfolios risks the chances of pushing acute and overwhelming financial burdens on otherwise healthy servicers across the market.
Such a development would hurt both the underpinnings of today's mortgage market and the average American homeowner alike.
John Holahan and Matthew Yoon are partners and co-heads of the capital markets regulatory team at Dentons.
Joshua Jordon is a partner at the firm.
Jessica Rebarber is a senior managing associate at the firm.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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