Reverse Mortgage Loan Blog

Ginnie Mae Plan Is Designed to Raise Market’s Liquidity 

Federal housing-finance agency Ginnie Mae plans to roll out as soon as today what it calls the first “standardized” bond issue backed by reverse mortgages, a move aimed at boosting liquidity for one of the fastest-growing markets targeting baby boomers.

The offering, expected to total about $120 million, consists of more than 1,000 government-insured reverse mortgages, which allow homeowners 62 years old or older to turn home equity into income they don’t have to repay until they sell their homes.

Such loans have grown rapidly in popularity in recent years, thanks to the nation’s aging population, a lack of retirement savings and the rapid house-price gains in the first half of this decade. At the same time, a lack of a liquid secondary market for reverse mortgages — where lenders can sell, as opposed to hold, the loans they make, just as what they do with traditional mortgages — has constrained this growth.

Ted Foster, senior vice president for mortgage-backed securities at Ginnie Mae, said bundling reverse mortgages into securities could increase liquidity by providing capital-market funding sources to lenders and ultimately help drive down costs for consumers. “Our objective is to get the best price for consumers by supporting the underlying product,” he said. “Two years from now, the market [for reverse-mortgage-backed securities] will be there.”

For years, Fannie Mae, the government-sponsored provider of funding for home mortgages, has been the dominant buyer of reverse mortgages. Recently, lured by the product’s growth potential as baby boomers retire, more financial-services firms, including Lehman Brothers Holdings Inc. and Bank of America Corp., have been buying these high-yielding loans from lenders with the idea of repackaging them into securities for sale to investors.

But Mr. Foster said until now, reverse mortgages have been packaged and sold by investment banks only to a limited number of investors through private placements — via a complex tax-free structure called a Remic. The Ginnie Mae deal, he said, represents the first standardized reverse-mortgage security on the market and should help “open up the universe” to more investors, especially those with long-term investing horizons such as pension funds and insurance companies.

A reverse mortgage takes its name from the way cash flows between a lender and a borrower. Rather than sending mortgage payments to a bank, as with a traditional mortgage, the borrower receives money in the form of a lump-sum payment, equal payments over time or a line of credit. The lender gets repaid only when the home is sold or the borrower dies.

As a result, investors in the reverse-mortgage-backed bond receive payments — including accrued interest — only as the underlying loans are paid off. By comparison, investors in a traditional mortgage bond can expect a steady flow of cash from borrowers every month.

The number of reverse mortgages insured by the federal government — which represent about 90% of the total — jumped in the 12 months ended Sept. 30 to 107,558 from 76,351 a year earlier, according to the Federal Housing Administration. That is still a tiny slice of total mortgage originations.

The bond offering comes as the global credit-market turbulence continues to scare investors away from many types of mortgage securities. Mr. Foster said he expects the Ginnie Mae deal to “benefit from a flight to quality from investors’ side” as the bond “carries the full faith and credit” of the U.S. government.

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