Any day now, maybe even today, Ginnie Mae will announce the details on its Pass-Through Assistance Program (“PTAP”), through which Ginnie Mae will provide a liquidity facility for issuers that need help meeting their obligation as issuers to pass-through payments of regularly scheduled payments of principal and interest, regardless of whether the loans are subject to forbearance.  While quickly trying to finalize PTAP program documents, on Monday April 7th, Ginnie Mae announced that it would recognize servicing advance financing facilities under its Acknowledgement Agreement. Previously, Ginnie Mae would not recognize a servicing advance receivable as  an independent component of mortgage servicing rights related to loans pooled into Ginnie Mae securities (“MSRs”).  This new recognition improves the ability of servicers to finance a valuable income stream, which has proven increasingly costly as the COVID-19 pandemic has greatly challenged liquidity in the housing market. But this recognition comes with limitations, which we detail below.

BACKGROUND

Like Fannie Mae and Freddie Mac, Ginnie Mae permits its servicers, called “issuers,” to grant a security interest in their MSRs to secure a commercial loan. Each also used its version of a master form Acknowledgment Agreement to spell out the relative rights and obligations of the servicer, the secured creditor and Ginnie Mae. Unlike Fannie Mae and Freddie Mac, however, Ginnie Mae does not permit a servicer to grant a security interest in its MSRs to one secured creditor and a security interest in its servicing advance receivables to another; only one Acknowledgment Agreement by servicer is permitted by Ginnie Mae.

This difference in treatment is in part due to the fact that, unlike Fannie Mae and Freddie Mac, Ginnie Mae does not itself reimburse servicers for advances. Servicers instead must instead look to subsequent mortgagor payments and mortgage insurance and guaranty proceeds on the underlying pooled mortgage loans. Moreover, a secured creditor is afforded a very “skinny” cure right, if a Ginnie Mae servicer defaults in its pass-through obligations. If the secured creditor fails to cure the monetary default (within one business day), its security interest is automatically extinguished. Ginnie Mae will neither reimburse the secured creditor for its outstanding debt, either directly or indirectly though net sales proceeds, nor require the successor servicer to remit to the secured creditor reimbursement of servicing advances as and when received.

NOTE SECURITIZATION TRUST

For the past several years Ginnie Mae has permitted a note securitization structure pursuant to which the owner of the MSRs issues participation certificates representing the beneficial interest in certain components of its MSRs. These components have typically included the beneficial interest in excess MSRs and were expanded pursuant to Monday’s announcement to include the beneficial interest in P&I advance receivables and corporate and escrow advance receivables. These participation certificates are then sold to a trust pursuant to a repurchase agreement.

The trust then issues certain term and variable funding notes that are secured by these participation certificates.  In addition, the trust  also would issue a specific variable funding note (“MBS ADV Note”), which is only drawn upon if the holder elects to make an advance on behalf of the MSR owner if the MSR owner fails to make an advance required by Ginnie Mae or otherwise defaults under its Ginnie Mae guaranty agreement. Payments received that are related to these assets are passed through to investors in the notes issued by the SPV trust, provided that the holder of the MBS ADV Note will have seniority in payment priority over the other noteholders if such MBS ADV Note is drawn upon.

LIMITS TO THE AVAILABILITY OF A NOTE SECURITIZATION TRUST

While Ginnie Mae’s recognition of servicing advance receivables as an independent component of the MSR is a welcome change in policy and will permit some additional financing on these MSRs, the change does not solve for the two issues identified above.

Most importantly, even if Ginnie Mae is now recognizing servicing advance receivables as a distinct component of the MSR, Ginnie Mae has not eliminated or modified what is the most cumbersome limitation for investors in these MSRs. As noted above, Ginnie Mae continues to retain the ability to refuse to honor the rights of the secured party, following termination of the issuer and seizure of the servicing (other than if a secured creditor cures a monetary default within one business day of notice). Practically speaking, this means that any capital lent against servicing advances (or the MSR more generally), while technically recoverable from several sources other than the servicer, is inextricably linked to the performance and creditworthiness of the servicer.

In addition, Ginnie Mae’s recognition of these separate rights has been limited to its note securitization structure described above and has not de-linked the servicing advance receivable right from the MSR. In other words, Ginnie Mae has, thus far, not recognized the servicing advance receivable rights belonging to one financing with one unique investor or creditor as separate and apart from the MSR which may belong to a separate investor or creditor in a separate financing. The implication is Ginnie Mae will still only recognize one “secured party,” and any other party looking to realize on these assets will only be able to do so through an intercreditor arrangement.

In sum, while Ginnie Mae’s recognition of servicing advance receivables as being a component of the MSR is an improvement from its prior position, this new policy will only permit additional financing for these receivables in a limited context.

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