Magazine article Mortgage Banking

Float Loss

Magazine article Mortgage Banking

Float Loss

Article excerpt

The Mortgage Bankers Association of America (MBA) is anticipating the upcoming GNMA REMIC program. MBA expects that this program will increase the efficiency of the sale of FHA/VA loans in the secondary market. Consequently, the benefits of lower yields on the MBS should be passed through to borrowers.

However, to facilitate the implementation of the REMIC, MBA has heard that GNMA plans to mandate that GNMA I remittances be transmitted to security holders utilizing the ACH debit by a centralized processing agent. With REMIC structure, GNMA will be guaranteeing a second payment disbursement to the REMIC holders. This added liability provides the rationale for a mandatory ACH debit transfer.

Since its inception, the Participants Trust Company (PTC) has urged that issuers remit GNMA I payments to PTC through ACH transfers. However, because outstanding securities are governed by guaranty agreements that permit payment by check, GNMA, to date, has given issuers the option for voluntary ACH debits and wire transfers. It also has encouraged payment by consolidated check.

MBA is very pleased that GNMA made the decision to apply the ACH debit transfer prospectively so that outstanding guaranty agreements would not be amended. This approach will avoid a reduction in servicing values.

Since late March, when GNMA began talking openly about the proposed mandatory ACH debit, MBA has been seeking to understand the ACH debit process in order to assess whether our members could be adversely affected by proposed change. The answer is unclear. The intent of senior GNMA officials appears to be to debit issuers' accounts on the evening of the 15th with good funds available to GNMA on the 16th. This would allow payment by PTC to REMIC holders on the same date. As this is written, uncertainty exists as to whether a centralized processing agent can meet this preferred time frame. We understand that the alternative scenario would require ACH debit of issuers' account to be initiate on the 14th of the month. Initiation on the 14th allows for funds to be available to GNMA on the 15th of the month, and ensures that the PTC will have funds available to pay holders of interests in the REMIC securities on the 16th of the month. Under this scenario, issuers will lose the benefit of the remittance funds on the 15th of the month, as opposed to the 16th of the month or possibly later (when the 15th falls on a Friday) when payment is made by check to the security holder. MBA has sent a letter to GNMA strongly opposing any program change that would adversely affect the "float" benefits that issuers currently enjoy. The letter also documents the magnitude of the financial impact on issuers that this loss of float would have and has had incrementally during the past few years.

PTC was established in March 1989, as successor to the Mortgage-Backed Securities Clearing Corporation (MBSCC), to address a variety of inefficiencies in the process of physical delivery of GNMA I securities. Initially, PTC was receiving approximately $79 million in monthly GNMA I security remittances. Currently, PTC receives approximately $8 billion in monthly GNMA I security remittances. PTC is the registered holder of at least 93 percent of outstanding GNMA I securities. Of the issuers MBA surveyed recently, PTC was the holder of 90 percent to 99 percent of the outstanding GNMA I issuances.

Prior to the establishment of the PTC, MBSCC was trying to phase in, by coupon rate, the use of this depository for GNMA MBS issuance and the collection and disbursement of principal and interest payments to investors. …

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