Ginnie Mae clarifies its MBS Guide with respect to seasoning of VA IRRRLs that are a “Refinance of a Modified Loan.” Issuers had challenged Ginnie Mae’s buy out demands that claimed insufficient seasoning when measured from the first payment date of an intervening modification of the loan, even though sufficiently seasoned from the first payment under the pre-modified loan terms. With this APM and accompanying changes to its MBS Guide, Ginnie Mae restates its position in those demands, but the future effective date provides some relief.

In a previous article, I explained issuers were challenging Ginnie Mae buyout demands that measured seasoning from the first payment due date under the re-pooled modification. We argued that the MBS Guide and the statute specified measuring from the first payment date on “the loan being refinanced”^[1] and that the refinanced loan’s first payment was the original payment on the underlying loan, not the first payment under the re-pooled Ginnie Mae security. In our prior article we expressed that a security may be backed by a loan, but the security does not change the terms of the loan, even if the loan was modified and re-pooled.

With APM 21-06 Ginnie Mae responds by announcing revisions to its MBS Guide taking effect on January 1, 2022, that reassert its practice of measuring the seasoning of the Refinance of a Modified Loan from the date of the first payment under the Modified Loan’s MBS pool. To accomplish that it redefines what constitutes a loan for purposes of securitization under the MBS Guide.

Changes to the MBS Guide announced in APM 21-06

The following relevant MBS Guide changes were announced in APM 21-06[2]:

1. Amended definition of a Modified Loan, adding: “At pooling, Modified Loans are regarded as new loans and judged on the modified terms under which the loans were pooled.”[3]
2. Newly defined term “Refinance of a Modified Loan” that means “a Refinance Loan that is used to pay off a Modified Loan…”[4]
3. Express statement that “Except as noted below,[5] any VA-guaranteed Loan Refinancing a Modified Loan is subject to the Seasoning Requirements…”[6]
4. Express statement that “Modified Loans are not subject to Seasoning Requirement[s]…”[7]

Additionally, APM 21-06 states:

1. “At pooling, Modified Loans are considered new loans and the modified terms are the basis under which the loans were pooled.”
2. “Since the modified loan that is being refinanced is considered a new loan based on the modified terms, the modified loan must be seasoned before it can be refinanced and pooled into Ginnie Mae MBS.”

Taken together, what might appear innocuous at first glance, is a critical declaration that a Modified Loan is its own “loan type”^[8] and while not itself a Refinance Loan subject to seasoning, it becomes the equivalent of a Refinance Loan for determining the first payment for seasoning when it is refinanced. In other words, the seasoning period for the Refinance of a Modified Loan will not look back to the first payment on the loan being refinanced, instead it will only look back to the first payment on the underlying modification.

Ginnie Mae guarantees MBS pools and seasoning’s purpose is protecting the pool

Ginnie Mae guarantees mortgage-backed securities, and to that end, it has consistently expressed that its seasoning rules are intended to prevent early liquidation through refinancing and that prepayment of a modified and re-pooled loan is just as harmful to prepayment rates as the early refinance of a newly originated and securitized purchase loan. Its intent remains ambiguous given its historical position that protecting the MBS pool was cause to measure seasoning from the first payment date under the pool, rather than the first payment date on the loan documents. Ginnie Mae could have simply stated that seasoning is measured from the first payment under the pool.

More closely scrutinizing the first MBS Guide change and APM 21-06 statement referenced above, we see both reference there effect “At pooling.” Modifications are “new loans and judged on the modified terms under which the loans were pooled.” Or, as the APM states it, “the modified terms are the basis under which the loans were pooled.”

However, a plain reading suggests the “modified terms” will be identified at the time of pooling and form the basis for determining seasoning. That is, the first payment under the modified amortization schedule will be the starting date for determining seasoning. But that conflicts with observed Ginnie Mae practice of determining seasoning from the first payment date under the pool. To substantiate Ginnie Mae’s historical practice, a more difficult reading requires “at pooling,” and “under which the loans were pooled” to ignore the written terms of the modification and take the next first payment under the pool.

It seems more natural to assume the terms of the modified loan replace the terms of the original loan, and those terms are the terms expressed in the modification agreement in writing, which is not controlled by the pooling date or the Ginnie Mae guide. But as expressed above, Ginnie Mae sets the terms for issuing its securities guarantee, not for whether a veteran qualifies for a modification or even qualifies for a Refinance of a Loan Modification. The VA may guarantee the IRRRL even if Ginnie Mae determines it is ineligible for its MBS pools.

Accordingly, APM 21-06 does not entirely clarify the questions posed by issuers with respect to the timing of seasoning. Ginnie Mae has not plainly and unambiguously stated whether, in cases where payments were received on a Loan Modification prior to issuance in a new pool, it will base seasoning on the first payment date as expressed by the Loan Modification documents or the first payment under the pool. The same question appears to remain unanswered with respect to seasoning of loans that were not modified. And, if the answer is based on the first payment under the pool, Ginnie Mae has not clearly indicated how a Veteran or originating lender can know that date to understand when s/he is eligible to refinance a loan that can be included in an MBS pool guaranteed by Ginnie Mae.

Additional Considerations

The second of the APM quotes above is a bit confusing. What Ginnie Mae is saying is that because a Modified Loan is deemed a new loan for determining whether its refinance is properly seasoned, a Modified Loan’s seasoning does not consider any payments or time occurring prior to the modification.

Finally, the APM states that “Ginnie Mae is removing language in Chapter 24, section A(2)(c) permitting the loan modification date to be used as the origination date for pooling. In accordance with Appendix III-07 to this guide, the Loan Origination Date should be the Note date, or date the loan was originated.”[9] However, the only relevant reference in Ch. 24 Part 2 § A(2)(c) remains in the MBS Guide. It states: “The date of loan modification may be used as the origination date for the purpose of pooling.” The text is permissive allowing lenders to respect the APM’s apparent intent to use the original note date, or date the loan was originated.

However, given that:

1. the APM’s language stating: “Modified Loans are considered new loans and the modified terms are the basis under which the loans were pooled,” and
2. the MBS Guides language stating: “Modified Loans are regarded as new loans and judged on the modified terms under which the loans were pooled;”

it is far from clear whether the APM’s statement that “the Loan Origination Date should be the Note date, or date the loan was originated” refers to a pre-modification or post-modification date.

Conclusion

In APM 21-06 Ginnie Mae acknowledges the confusion that existed around IRRRL loans that are a Refinance of a Modified Loan. It adjusts MBS Guide definitions to support its position that seasoning requires six payments and 210 days after the first payment date of a Modified Loan in a guaranteed pool.

The APM is not clear whether the first payment date for the seasoning calculation will be based on the stated first payment on the modification documents or the first payment date under the pool. We believe Ginnie Mae is revising the MBS Guide to substantiate its preexisting policy and delaying its effect until January 1, 2022. Accordingly, we presume Ginnie Mae will continue to calculate seasoning from the first payment under the pool, though we are unsure how Ginnie Mae anticipates a Veteran or third-party lender will learn the first payment date under the pool prior to origination.

Lenders should reexamine and implement any revised underwriting standards and operating practices not later than January 1, 2022. Thereafter, issuers’ quality control must ensure six consecutive monthly payments have been made on the underlying loan and that 210 days have elapsed between the first payment and the origination or note date of the new IRRRL. We advise a conservative approach that measures from the first date under the pool and to the earlier of the origination date or note date. In the event of an oversight resulting in a near miss, VA guidelines may be more permissive allowing the loan to remain guaranteed by the VA, while not eligible for pooling in Ginnie Mae securities.