While residential mortgage loan servicers, trade associations and various members of Congress have been urging the Department of Treasury and the Federal Reserve Board to provide a dedicated servicing advance facility, Ginnie Mae did just that. On April 10, 2020, Ginnie Mae announced the final terms of its much-anticipated Pass-Through Assist Program for Issuers of mortgage-backed securities (MBS) that are in need of funding for the increased amount of servicer advances due to the COVID-19 national emergency. Referred to as “PTAP/C19” for short, this program, according to Ginnie Mae, will “support Issuers in their administration of borrower relief measures, such as extended forbearance and moratoriums on foreclosures and evictions, announced by the federal agencies providing the mortgage insurance or guaranty.”
By recognizing servicers’ need for increased liquidity due to a national emergency that is not of their own making, Ginnie Mae signals that the federal government and the mortgage industry should work in partnership to enable borrowers to obtain the relief they need. Without such collaboration, the implementation of borrower relief programs could unwittingly materially damage the lenders and servicers through which the relief must be provided. For this reason, Ginnie Mae deserves a “shout-out.”
Before we go into details of the PTAP/C19 program, note that this Ginnie-provided servicing advance facility is substantially similar to the existing Pass-Through Assistance Program outlined in Chapter 34, Part 2, Section D of the Ginnie Mae Guide, which has assisted Issuers with MBS payment deficiencies in the wake of 9/11 and natural disasters. Like the existing Pass-Through Assistance Program, PTAP/C19 is evidenced by the execution of a Supervisory Agreement that details the terms and conditions of the financing support and its repayment, although with several substantive changes.
Unlike the existing PTAP program, Issuers that avail themselves of the benefits of PTAP/C19 will remain in good standing and will not be in technical default under their Guaranty Agreements with Ginnie Mae. PTAP/C19 also has a longer maturity (seven months or the end of July 2021, whichever is earlier, versus 90 days for the existing PTAP) and comes with significant restrictions on executive compensation and distributions while any draws remain outstanding. We summarize these and other salient features of PTAP/C19 below.
The “Last Resort”
The Master Supervisory Agreement governing an Issuer’s participation in PTAP/C19 requires Issuers to seek assistance first from other sources before requesting “Payments” or advances from Ginnie Mae under this program. To that end, in connection with its initial request for a Payment, an Issuer must submit a signed statement setting forth its previous efforts to obtain private funding to cover the relevant deficient MBS payments and the Issuer’s plan for repaying Ginnie Mae for advances under PTAP/C19. Without detailing exactly what sort of “efforts” Issuers need to demonstrate to qualify for participation in PTAP/C19, one would expect that private financing sources must be fully utilized to meet any such principal and interest (P&I) advance obligations, with an accompanying attestation that additional liquidity was unavailable or only available on terms that are commercially unreasonable.
If this is alone not enough to cause an Issuer to think long and hard about seeking PTAP/C19 advances where it could have found alternative sources of funding, each request for a Payment also contains a False Claims Act statement to remind the Issuer that the knowing submission of false statements may be subject to criminal and civil penalties.
Ginnie Mae will also evaluate each monthly request for a Payment, and Issuers participating in the program will be required to deliver financial statements and mortgage servicing rights (MSR) valuations on a monthly basis. As a result, Issuers can expect to have their financial condition examined in connection with each request, and if Ginnie Mae determines that an Issuer is unlikely to be able to ultimately repay the advances (or, ostensibly, Ginnie Mae determines that the Issuer has sufficient alternative resources), their request for an advance may be denied. Note that the deadline for Ginnie Mae’s approval is not until one business day prior to the date that the corresponding monthly remittance payment is due, creating at least a technical possibility that an Issuer may be left without funds to make a monthly remittance at the last moment and fall immediately into default. Hopefully Issuers will know well in advance of that deadline whether there will be a problem.
Finally, proving the old adage that “there is no such thing as a free lunch,” until all amounts borrowed under PTAP/C19 are repaid, Issuers cannot engage in certain financial transactions that would indicate they can fund advances without the assistance of PTAP/C19. Prohibited transactions for PTAP/C19 participants consist not only of distributions of dividends, stock buy-backs, and new loans to related parties but also increases in total cash compensation to Issuer executives, including stock options, bonuses, benefit increases, and other grants of stock. “Executives” for these restrictions are not defined, but the plural formulation alone suggests that they apply to more than just chief executive officers.
Only for P&I Advances; “Directly” Resulting from the C19 Emergency
Draws on this facility may only be used to advance P&I payments to MBS holders and cannot be used to fund any other operational or servicing costs (e.g., delinquent taxes or insurance owed in respect of the underlying mortgages). Furthermore, an Issuer’s liquidity shortfall must be “directly attributable to the [C19] national emergency.”1 Left unsaid is what evidence an Issuer could provide to show that its liquidity shortfall is “directly” attributable to the onset of C19, but presumably a spike in delinquencies and forbearance requests would go far in making a case. Also note that as each Payment request is accompanied by a False Claims Act reminder, Issuers should be prepared to substantiate the basis for claiming that their distressed financial condition is directly related to this crisis.
A Payment may only be requested for, and applied with respect to, a P&I deficiency applicable to the month in which the request for Payment is made. Other than requests for Payments that are applicable for remittances due on April 20, 2020, which must be made not later than the end of the day on April 13, 2020—today—each monthly request must be submitted by the Issuer no earlier than the fifth business day, and no later than the sixth business day, of each month. In addition to the monthly financials and MSR valuations, Ginnie Mae can require additional documentation it deems appropriate to evaluate a request.
PTAP/C19 Principal and Interest Terms
Interest on all Issuer advances under PTAP/C19 for any month will accrue at a fixed rate announced by Ginnie Mae on the second business day of such month, beginning in most circumstances on the date on which such Payment is delivered to the Issuer.2
Unlike the existing version of PTAP, which requires repayment on advances with 90 days, PTAP/C19 requires payment in full within the earlier of last day of the month that is seven months from the date of the related Payment or July 31, 2021. While this maturity date can be extended with Ginnie Mae’s consent (in its sole discretion), note that a seven-month term (or shorter, for any P&I advance funded after December 2020) may not be sufficient for recovery of the amounts advanced. Borrower forbearances may last for a period up to a year, and, even after the forbearance periods end, recovery of the advances may be subject to further deferral in the form of payment plans or other modifications of payment terms. It also may not afford Issuers an opportunity to realize any proceeds from insurance claims prior to the expiration of the PTAP/C19 program unless the borrower qualifies for and the Issuer seeks “standalone partial claims” from the FHA or the other applicable insurance agency.3 Coupled with the Federal Reserve’s exclusion of servicing advances as eligible collateral for the “second generation” of the Term Asset Backed Securities Loan Facility,4 Issuers may be facing a similar liquidity crunch at the end of the term of the PTAP/C19.
The Issuer may prepay the Ginnie Mae-advanced amounts at any time. Indeed, proceeds received by the Issuer from claims filed with the applicable insurer or guarantor agency for the mortgage loans related to a Payment request must be applied first to pay corresponding amounts then owed under the PTAP/C19 program.
- Subordination of Third-Party Lenders and Other Impacts on Private Financings. Unsurprisingly, to the extent that an Issuer has already pledged to a third-party private lender the MSRs or other assets related to the MBS for which it is seeking Payments (or makes any such pledge in the future), Ginnie Mae has indicated that such third-party lender’s rights to the collateral will be automatically subordinated to Ginnie Mae’s right to reimbursement of the amount of the Payments and any related interest, pursuant to PTAP/C19. Depending on the initial documentation for that existing financing, this automatic subordination could put an Issuer in breach.
In addition, the mere existence of a “supervisory agreement” between an Issuer and Ginnie Mae can give rise to notice requirements or events of default under private financings (some of which are not related to Ginnie Mae collateral). As a result, before entering into a Master Supervisory Agreement, Issuers are advised to carefully assess their risks of default on such private financings. In this regard, the good standing and non-defaulting status of PTAP/C19-participating Issuers may ultimately be window-dressing and an unfortunate outcome of Ginnie Mae’s decision to name the governing documents “supervisory agreements.” (Supervisory agreements and similar arrangements are typically entered into with prudential regulators, like banking agencies, that have supervisory authority by statute, whereas the Ginnie Mae relationship is more contractual in nature, with a private party electing to participate in a government program.)
- Requests for April 2020 Payments. As mentioned above, requests for Payments applicable to P&I due in April 20, 2020, are due today, April 13, 2020. Normally, a copy of the Request for a Payment (Appendix XI-01A of the MBS Guide), two copies of the Master Supervisory Agreement, and the aforementioned letter regarding the Issuer’s attempts to obtain alternative financing would need to be executed and submitted prior to making any request, but Ginnie Mae has indicated that notwithstanding these requirements for documentation, an Issuer can still make a request today.
- Restrictions on Servicing Transfers. Issuers are not permitted to transfer any MSRs related to outstanding PTAP/C19 debts unless any such debt is assumed by the transferee. Presumably, however, proceeds from any sale of applicable MSRs could be used to satisfy any such outstanding amount as a condition to Ginnie Mae’s approval of transfer of issuer responsibility.
- Is Ginnie Mae Indicating That C19 Forbearances Are Delinquencies for Reporting or Other Purposes? As indicated in the revised Chapter 34 to the Ginnie Mae MBS Guide and elsewhere in the descriptions of PTAP/C19, payment delays due to mortgage loan delinquencies "such as forbearances" resulting from the C19 national emergency are sufficient bases for Issuers to seek assistance under the PTAP/C19 program. Whether or not forbearances will be treated as delinquencies for event of default or other performance triggers, or for other reporting purposes generally, is of course of significant consequence for Issuers. Whether Ginnie Mae intended for this statement to push the mortgage industry into a particular interpretation on this point is unclear. Nonetheless, even if Ginnie Mae only intended a limited application for the inclusion of COVID-19 forbearances in its delinquency statistics—e.g., for delinquency ratios, Issuer monthly reports, or other purposes under the Ginnie Mae MBS Guide—it could have significant downstream effects for Issuer eligibility and reporting operations.
- The Irony of PTAP as a Last Resort. Even prior to the outbreak of COVID-19, issuers have struggled to obtain private term advance financings for their Ginnie Mae portfolios. Part of the problem is the unique aspects of a Ginnie Mae MSR, where reimbursements of advances do not come from the agencies (as is the case with Fannie Mae and Freddie Mac) but from the underlying mortgage insurance or guaranty proceeds. But two other issues unique to Ginnie Mae have impaired the availability of private advance facilities for Ginnie Mae MSRs. The first is the inability to sever pledges of the MSRs from pledges of the right to be reimbursed for advances. The second, and most relevant for this purpose, is the unwillingness of Ginnie Mae to honor outstanding security interests in either MSRs or advances if it terminates an Issuer and seizes the MSRs, except pursuant to a very narrow cure right, requiring the secured party to quickly make Ginnie Mae whole for monetary defaults or forfeit any interest in the related collateral. Resolving these two long time issues would make it easier to obtain private financings.
We end with how we began—namely, with a big shout-out to Ginnie Mae. Ginnie Mae says that it is honoring its statutory duty to pay timely and in full principal and interest payments due MBS holders while minimizing any disruptions that may occur in the mortgage servicing market as a result of COVID-19. PTAP/C19 doesn’t solve all of the servicing industry’s problems, such as the mismatch between the term of the advance from Ginnie Mae and the expected timing of the receipt of mortgage insurance or guaranty proceeds or subsequent mortgagor payments to repay the loan. The industry still is waiting to see if the Federal Housing Finance Agency (acting through Fannie Mae and Freddie Mac) or the Federal Reserve will provide relief to servicers required to make advances on GSE MBS issuances. And advances that may be required for private label securitizations remain in search of a source of funds. Nevertheless, it is a good start, and a timely one at that.
1 Note that in the recitals in the Master Supervisory Agreement, which is signed one time at the first monthly request, the mortgage loans applicable to Payment requests are described as those “as of the date of this Agreement.” Taken literally, this would mean that on P&I advances on MBS in existence at the time of execution of the original Master Supervisory Agreement would be eligible for P&I advance requests. In contrast, Chapter 34 of the Ginnie Mae Guide indicates PTAP/C19 funds may be applied to P&I owed that is related any loans that are delinquent as of the date of the related request.
2 “… [E]xcept that, in instances where Ginnie Mae deposits a portion of the Payment to cover Ginnie Mae I Monthly Remittance and the balance of the Payment at a later date for purposes of covering the Ginnie Mae II Monthly Remittance, interest on the entire Payment shall begin to accrue on the first business day occurring after the day that Ginnie Mae deposits funds to cover the Ginnie Mae II remittance.” Section 9.b. of the Master Supervisory Agreement.
3See “FHA Issues Guidance on Special Loss Mitigation Options for Borrowers Affected by the COVID-19 National Emergency” for a detailed description of the FHA’s guidance regarding such partial claims.
4See “Federal Reserve’s Updated TALF Program Excludes Support for Mortgage Servicing Advance Financing” by Eric Edwardson.