[Federal Register Volume 59, Number 101 (Thursday, May 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12834]
[[Page Unknown]]
[Federal Register: May 26, 1994]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. R-94-1698; FR-3555-N-01]
Government National Mortgage Association; Real Estate Mortgage
Investment Conduit
AGENCY: Government National Mortgage Association, HUD.
ACTION: Notice of GNMA REMIC Program Implementation.
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SUMMARY: The Government National Mortgage Association (``Ginnie Mae'')
is implementing a new program under which Ginnie Mae will guarantee
multiclass mortgage-backed securities issued by trusts, each of which
will elect to be treated as a Real Estate Mortgage Investment Conduit
(``REMIC''). The program is intended to: (1) Benefit borrowers using
federally insured or guaranteed mortgages by increasing investment
demand for the single class Ginnie Mae guaranteed mortgage-backed
securities (``MBS'') that are backed by these mortgages, and which will
be the assets of the REMIC trusts, thus reducing financing costs for
these mortgages; and (2) raise revenues through the receipt of
guarantee fees by Ginnie Mae. The Ginnie Mae REMIC program will be
implemented in two stages: An initial stage, which will have a limited
number of participants and REMIC transactions, and a full participation
stage.
The statute authorizing the Ginnie Mae REMIC program provides for
implementation of the program by publication of a notice in the Federal
Register. This Notice is being published prior to implementation of the
initial stage, and provides opportunity to submit comments. A
supplemental notice will be published prior to implementation of the
full participation stage, and will provide another opportunity to
submit comments, after which a final rule will be issued.
DATES: Effective date: May 26, 1994.
Comments due date: July 25, 1994.
ADDRESSES: Interested persons are invited to submit comments regarding
this Notice to the Office of General Counsel, Rules Docket Clerk, room
10276, Department of Housing and Urban Development, Washington, DC
20410-0500. Communications should refer to the above docket number and
title. A copy of each communication submitted will be available for
public inspection and copying on weekdays between 7:30 a.m. and 5:30
p.m. at the above address. Facsimile (FAX) comments are not acceptable.
FOR FURTHER INFORMATION CONTACT: Guy S. Wilson, Vice President,
Government National Mortgage Association, room 6151, 451 Seventh
Street, SW., Washington, DC 20410-9000, telephone (202) 401-8970.
Hearing or speech-impaired individuals may call HUD's TDD number (202)
708-3649. (These telephone numbers are not toll-free.)
SUPPLEMENTARY INFORMATION:
I. Background
Ginnie Mae was created in 1968 as a wholly-owned Government
corporation within the Department of Housing and Urban Development. As
set out in Title III of the National Housing Act (12 U.S.C. 1716 et
seq.), Ginnie Mae was established to assist in the movement of funds
from investors into the housing market. Ginnie Mae's most effective
tool in accomplishing this mission has been the Ginnie Mae guaranteed
MBS. Through its MBS program, Ginnie Mae guarantees the timely payment
of principal and interest on securities issued by private institutions
and backed by pools of mortgage loans which are insured or guaranteed
by the Federal Housing Administration, the Department of Veterans
Affairs, and the Farmers Home Administration (``Government
mortgages''). Ginnie Mae MBS are sought by investors because the full
faith and credit of the United States stands behind the Ginnie Mae
guarantee.
Eligible mortgages are put into groups or pools by a ``Ginnie Mae
issuer,'' an entity that has been approved by Ginnie Mae to pool
Government mortgages and sell, or ``issue,'' Ginnie Mae guaranteed
securities. By selling the security to investors, the issuer is able to
recapture the outstanding balance of the mortgages, which can then be
used to fund more mortgages. Lenders that are not Ginnie Mae issuers
also gain liquidity through the MBS program because they can sell
Government mortgages to Ginnie Mae approved issuers for inclusion in
pools.
Holders of Ginnie Mae MBS receive monthly payments made up of
principal, including prepayments, and interest on the underlying
mortgage loans. The amount of interest ``passed through'' to security
holders is reduced by payment of a fee to cover servicing of the
mortgages (in the case of single family mortgages, at an annual rate of
44 basis points on the unpaid principal balance of the mortgage) and a
fee to Ginnie Mae for its guarantee (for single family mortgages, at an
annual rate of 6 basis points).
Under the ``modified pass-through'' approach used by Ginnie Mae,
the issuer of the MBS is initially responsible for advancing scheduled
but delinquent principal and interest payments to security holders.
That is, if mortgagors fail to make timely payments of principal and
interest, the issuer of the Ginnie Mae MBS promises to advance the
necessary funds so that scheduled payments can be made to the security
holders. If the issuer fails to advance or pass through payments,
Ginnie Mae makes timely payment under its guarantee.
The Federal National Mortgage Association (``Fannie Mae'') and the
Federal Home Loan Mortgage Corporation (``Freddie Mac'') have issued
REMIC securities which are backed by Ginnie Mae MBS (in addition to a
substantial volume of REMIC securities backed by their own MBS).
However, while Fannie Mae and Freddie Mac are government sponsored
enterprises, they are not federal government entities, and neither
Fannie Mae nor Freddie Mac is authorized to issue a REMIC security
which is backed by the full faith and credit of the United States. Some
depository institutions, pension funds and other types of investors are
required or desire to invest a portion of their funds in instruments
directly backed by the full faith and credit of the U.S. Government.
Because Ginnie Mae can provide such a full faith and credit guarantee,
Ginnie Mae guaranteed REMIC securities are likely to be attractive to
such investors, even though other REMIC instruments backed by Ginnie
Mae MBS are presently available.
Section 3004 of the Omnibus Budget Reconciliation Act of 1993
(``OBRA''), 107 Stat. 339, contains guidance for implementation of a
program under which Ginnie Mae will guarantee such multiclass
securities and the use of contracts to ensure the efficient
commencement and continued operation of a multiclass securities
program. Under this authority, Ginnie Mae has employed a financial
advisor (``Financial Advisor'') and a legal advisor (``Legal Advisor'')
to assist in the initiation of the program.
II. The Ginnie Mae Guaranteed REMIC Program
A. General Description
The MBS guaranteed by Ginnie Mae have a single class of ownership
interests. In a single class MBS, each security sold bears the same
coupon rate of interest, has the same scheduled maturity, and has the
same expected average life. Each holder of a single class MBS is the
owner of an undivided beneficial interest in the mortgage pool and is
entitled each month to receive: (1) Interest at a fixed rate, and (2) a
pro rata share of all principal payments, including prepayments, made
on the underlying pool of mortgages. For this reason, MBS are not
attractive to certain investors who want to invest in securities
tailored to their individual investment goals. Multiclass securities,
the most common of which today are REMICs, were developed to meet this
need.
The REMIC structure permits allocation of the underlying cash flow
from MBS to multiple classes of securities with differing maturities
and interest rates. The cash flow allocation specified at creation of
the transaction establishes the rights of the various classes of
security holders to receive interest and principal payments. These
allocations may result in REMIC investors receiving repayment of
principal and/or interest at different times. For example, the
different maturity classes, which are commonly referred to as
``tranches,'' might have expected maturities of 2, 5, 7, 10 and 20
years with each of these classes paying a different rate of interest.
Because the amount and timing of the pass-through of funds to the
investor is tailored to the investor's specific financial goals, the
value of the REMIC tranches is increased. The timing and amount of
payments on tranches may vary depending on the prepayments of the
mortgages backing the single class MBS. However, total payments to all
REMIC investors correspond to the total full and timely payments on the
single class MBS in the REMIC pool or trust. REMIC trusts are not
treated as separate taxable entities and, thus, there is no double
taxation, pursuant to sections 860A through 860G of the Internal
Revenue Code of 1986 (the ``Code'').
The Ginnie Mae REMICs will be backed by Ginnie Mae guaranteed MBS.
Government mortgages will continue to be pooled, and a traditional
single class Ginnie Mae MBS will be issued in the customary fashion by
Ginnie Mae issuers. These Ginnie Mae MBS will be pooled in a second
stage transaction, and multiclass Ginnie Mae pass-through securities
will be issued. The second stage transaction will elect tax treatment
under the REMIC provisions of the Code. Ginnie Mae will guarantee the
full and timely payment of principal and interest on the REMIC
securities.
The Ginnie Mae REMICs will be issued through single purpose trusts
created by knowledgeable and financially sound firms (the ``sponsors'')
that assemble the Ginnie Mae MBS, take the initiative in forming the
trust, in developing the structure for the REMIC securities (i.e., how
many tranches with what characteristics), in preparing the description
and disclosure for the offering documents and in marketing the REMIC
securities.
In a REMIC transaction, there must be an identifiable pool or trust
(Ginnie Mae expects a separate trust to be used for each REMIC) and a
trustee of proven reliability and competence to ensure that amounts
owed to the trust are collected by it, that the correct amounts are
paid out timely by the trust to the holders of the REMIC securities,
and that accurate records and reports are prepared and furnished to
security holders, auditors, the IRS, and Ginnie Mae. Ginnie Mae will
require that the REMIC trustee make available to Ginnie Mae the full
financial details of the REMIC trust and that the trustee follow
industry performance standards. Rules and procedures governing the
trust and its operation, including detailed rules as to distributions
of principal and interest to each class, must be spelled out in trust
documents approved or prescribed by Ginnie Mae. Experienced trust
counsel will be responsible for modifying the standard documentation
for each trust and issuing the customary trust counsel opinions for
reliance by Ginnie Mae, among others. Verification that the obligations
of the REMIC securities pursuant to the terms of the trust documents
can be met under all possible patterns of cash flows (``structural
integrity'') must be represented without qualification to Ginnie Mae by
the sponsor and Ginnie Mae's Financial Advisor. In addition, a
qualified accounting firm must provide Ginnie Mae with a customary
comfort letter.
Sponsors must indemnify Ginnie Mae, with interest, for any payments
that Ginnie Mae makes pursuant to its REMIC securities guaranty because
of a defect or lack of structural integrity of the REMIC transaction.
Trustees must indemnify Ginnie Mae for losses caused by any breach of
obligations to or for the benefit of Ginnie Mae as set forth in trust
documents.
B. Eligible MBS
Ginnie Mae expects that Ginnie Mae REMIC trusts will be required to
pass through cash electronically to REMIC security holders on the same
day that the trusts receive immediately available funds on the Ginnie
Mae MBS they hold. To facilitate this, only MBS with the following
characteristics will be permitted: (1) Ginnie Mae I MBS issued on or
after February 1, 1993; (2) backed by single family mortgages; (3) in
book entry form; and (4) registered in the name of the designated
depository.
C. Depository
At the present time, as a program control element, Ginnie Mae has
designated that REMIC securities be registered at the same depository
as is currently the depository for Ginnie Mae MBS, Participants Trust
Company (``PTC'').
D. Ginnie Mae Guaranty Fees
The Ginnie Mae guaranty fee is initially set at 20 basis points.
This fee may be adjusted upward or downward at such times and in such
manner as Ginnie Mae determines appropriate.
E. Payment Date
REMIC securities holders will be paid on the 16th day of each
month, or if the 16th is not a business day, on the first business day
following the 16th.
F. Other Program Fees
During the initial stage, Ginnie Mae will have no liability for
payment of any fees or expenses (other than those of Ginnie Mae's Legal
Advisor; see below) in connection with Ginnie Mae REMIC transactions,
such as those of trustees, trust counsel and accounting firms,
including payment of Ginnie Mae's Financial Advisor. These fees and
costs will be paid out of the sales proceeds, and closing will be
contingent upon their payment, except for payments to the trustees,
which will be paid by the trust from the trust cash flow.
III. Authority
Ginnie Mae's authority to guarantee REMIC instruments is contained
in section section 306(g)(1) of the National Housing Act (``NHA'') (12
U.S.C. 1721(g)(1)), which authorizes Ginnie Mae to guarantee
``securities * * * based on or backed by a trust or pool composed of
mortgages * * * .'' The REMIC securities will be based on or backed by
mortgages since Ginnie Mae MBS will serve as the collateral. The Fannie
Mae and Freddie Mac REMIC programs are authorized by substantially
similar statutory provisions. Further, Ginnie Mae's authority to
operate a REMIC program has recently been confirmed in section 3004 of
the OBRA which amended section 306(g)(3) of the NHA (12 U.S.C.
1721(g)(3)) to provide Ginnie Mae with greater flexibility for the
REMIC program regarding fee structure, contracting, industry
consultation and program implementation. The General Counsel for the
Department of Housing and Urban Development will issue a legal opinion
that, pursuant to section 306(g) of the National Housing Act, Ginnie
Mae has the statutory authority to guarantee the timely payment of
principal and interest on the REMIC securities in accordance with the
terms and conditions of the trust agreement, and that this guaranty is
backed by the full faith and credit of the United States.
In appropriations legislation, Congress annually sets Ginnie Mae's
commitment authority to guarantee MBS. The amount of MBS commitment
authority authorized by Congress is set forth in section 306(g)(2) of
the NHA (12 U.S.C. 1721(g)(2)). Since the REMIC securities will be
backed by Ginnie Mae MBS, Ginnie Mae has already guaranteed the
collateral for the REMIC. Accordingly, it has been determined that the
section 306(g)(2) limitations are not affected by, and do not limit the
issuance of, Ginnie Mae's guarantees of REMIC securities. This
determination was supported by the House of Representatives Committee
on Appropriations. (See H.R. Rep. No. 103-150, 103D Cong., 1st Sess. at
34.)
IV. Initial Stage
Ginnie Mae is beginning its REMIC program with an ``initial
stage,'' which is expected to have a duration of several months, until
standard policies, procedures and documents are developed and the full
participation stage can be commenced. During the initial stage, Ginnie
Mae will guarantee REMICs that are issued by a small number of
participants, consisting of sponsors, co-sponsors, trustees, trust
counsel and accounting firms, selected by Ginnie Mae through the use of
Competitive Application Proposals (``CAPs''). In addition, Ginnie Mae
has obtained the services of a Legal Advisor and a Financial Advisor
through competitive proposals to provide Ginnie Mae with assistance in
implementing the REMIC program. In the initial stage, Ginnie Mae will
develop documents that will serve as the basis for all subsequent
REMICs, as well as guidelines and procedures.
During the initial stage, Ginnie Mae will establish an order of
rotation for each of the five participant functions. Teams, consisting
of a sponsor, co-sponsor, trustee, trust counsel and accounting firm,
will be created based on the rotation. Ginnie Mae anticipates that
several team rotations will be required before the full participation
stage can commence.
V. Full Participation Stage Notice
Following the initial stage, the Ginnie Mae guaranteed REMIC
program will be opened to all approved sponsors. Ginnie Mae will issue
a REMIC Guide, which will contain Ginnie Mae's requirements for
participation in the Ginnie Mae REMIC program as well as Ginnie Mae's
standard documents. Ginnie Mae will publish another notice, which will
contain specific procedures for initiating Ginnie Mae guaranteed REMIC
transactions in the full participation stage.
VI. Terms and Conditions for Participants
As a condition of participation in the program, each participant
must agree to the conditions set out below.
A. Participant Certification
Participants must certify, in a statement made under penalty of
perjury, regarding all professionals working on a transaction, whether
for the participant or for a contractor of a participant, that neither
the corporate or partnership entity nor any officer, partner, or
professional presently employed and who will work on the subject matter
of this Notice has been convicted of, or found liable in a civil action
for, fraud, forgery, bribery, falsification or destruction of records,
making false statements or any other offense indicating a lack of
business integrity that seriously and directly affects the present
responsibility of the officer, partner or professional and is not
currently suspended or debarred by any government agency.
B. Maintaining Eligibility.
Participants will provide Ginnie Mae annually with such
documentation as Ginnie Mae shall require demonstrating that the
participant continues to meet the eligibility requirements for
participation in the Ginnie Mae REMIC program.
C. Disclosures
A participant shall provide disclosures of the following:
(1) Any indictments, convictions, civil suits or judgments
described in Section V, within 30 days of their occurrence;
(2) Material adverse changes in status including voluntary and non-
voluntary terminations, defaults, fines, and agency findings of
material non-compliance or non-conformance with agency rules and
policies with state and federal agencies and government sponsored
enterprises within 5 business days of their occurrence; and
(3) A change in control within 30 days of its occurrence. In a
merger, consolidation, acquisition, division, issuance of securities,
sale, or other business combination where the control of the original
participant has changed materially, the surviving party shall
demonstrate to Ginnie Mae's satisfaction its qualification to act as a
participant and its ability and agreement to assume all previously
incurred obligations and liability to Ginnie Mae of the original
approved participant.
D. Suspension From the Ginnie Mae REMIC Program
The participant's eligibility may be suspended upon written notice
from Ginnie Mae, which shall include the reasons for the suspension.
Upon such notice, the participant shall have the opportunity to present
a written submission to the President of Ginnie Mae in support of its
reinstatement, which submission shall exhaust the participant's
administrative remedies.
VII. Default
If Ginnie Mae is required to perform under its guarantee of any
REMIC security, Ginnie Mae intends to pursue all available avenues of
recovery.
VIII. Minority and Women-Owned Business Participation
Ginnie Mae requests comments on how Ginnie Mae can best meet its
goals for participation by minorities and women. For the initial stage,
the CAP for sponsors provides for the selection of both sponsors and
minority and women-owned businesses (``MWOB'') co-sponsors. Ginnie Mae
will require that sponsors include a MWOB co-sponsor selected by Ginnie
Mae in each initial stage Ginnie Mae REMIC transaction. It is Ginnie
Mae's understanding that a similar mandatory co-sponsor approach for
MWOBs is used by the Resolution Trust Corporation (``RTC'') and
Department of Veterans Affairs (``VA'') for their REMIC programs.
However, Ginnie Mae anticipates that the full participation stage
of its REMIC program may involve 100 or more REMIC transactions per
year, which is much larger than the RTC and VA programs. The RTC and VA
REMIC programs also are distinguishable in that RTC and VA own the
collateral and actively participate in the issuance of REMIC
securities. In contrast, during the full participation stage of the
Ginnie Mae program, collateral will be assembled and REMIC transactions
will be presented to Ginnie Mae for guaranty approval with the
participants and the proposed terms of the transactions already in
place.
A. Types of MWOB Participation
GNMA requests comments on the type of MWOB participation in the
GNMA REMIC program. For example, should there be an aggregate MWOB goal
for each transaction (e.g., accounting firm, trust counsel, and
others), or should the Ginnie Mae REMIC program include a co-sponsor
component only, as in the initial stage.
If a commentor believes that Ginnie Mae should have an MWOB co-
sponsor component, Ginnie Mae requests comments on how a co-sponsor
component could be coordinated in the full participation stage and
whether there are other programs comparable to the Ginnie Mae REMIC
program that use a co-sponsor component (including information on the
size of such other programs and contact persons and telephone numbers).
Also, Ginnie Mae solicits detailed comments on what the role of any
co-sponsor should be and how Ginnie Mae should oversee arrangements
between sponsors and co-sponsors. Comments should address: (1) Whether
Ginnie Mae should specify a minimum percentage for co-sponsor
participation and, if so, what the percentage should be and to what it
should apply; (2) whether co-sponsors should be required to take
harder-to-sell REMIC tranches as well as easier-to-sell tranches; (3)
whether co-sponsors should be required to share in the capital risk of
accumulating MBS; (4) whether Ginnie Mae should specify the discount at
which co-sponsors acquire their REMIC securities and, if so, what that
discount should be; (5) whether Ginnie Mae should specify the
consequences of a co-sponsor's failure to fulfill its obligations to
the lead sponsor and, if so, what those consequences should be; and (6)
the process that Ginnie Mae should employ before consequences are
imposed upon a co-sponsor.
In the comments on these issues, Ginnie Mae requests that
commentors include a discussion of the feasibility of their proposals,
and the advantages and disadvantages of each proposal.
B. Types of Incentives
Ginnie Mae requests comments on: (1) What might be appropriate
incentives to encourage participants to include MWOB participation in
the Ginnie Mae REMIC transactions, either in the aggregate or as co-
sponsors; (2) whether a mandatory or an encouragement/goal oriented
system should be used; (3) the current state of the law, including the
recent cases Metro Broadcasting, Inc. v. F.C.C., 110 S.Ct. 2997 (1990)
and Lamprecht v. F.C.C., 958 F.2d 382 (DC Cir. 1992). Executive Orders
12432 (3 CFR, 1983 Comp., p. 198) and 12138 (3 CFR, 1979 Comp., p. 39),
respectively, are applicable to participation in the Ginnie Mae REMIC
program.
During the initial stage, Ginnie Mae will consider the comments
received in response to this Notice, and will make a determination for
the full participation stage.
IX. Publication of Final Rule
Pursuant to section 3004 of the OBRA, final regulations for the
Ginnie Mae REMIC program must be published within twelve months of the
publication of this notice. This notice will be supplemented by further
publication in the Federal Register prior to publication of the final
regulations in order to provide additional information for procedures
applicable to the full participation stage.
X. Other Matters
Executive Order 12866, Regulatory Planning and Review
Since this document ultimately will serve as the foundation for
development of a final rule and is the basis for a new program, it was
sent to the OMB for review under Executive Order 12866 and was approved
for publication.
Environmental Review
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations at 24 CFR part 50,
which implement section 102(2)(C) of the National Environmental Policy
Act of 1969. The Finding of No Significant Impact is available for
public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the
Office of the Rules Docket Clerk, Office of the General Counsel,
Department of Housing and Urban Development, room 10276, 451 Seventh
Street, SW., Washington, DC 20410.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that this notice
does not have ``federalism implications'' because it does not have
substantial direct effects on the States (including their political
subdivisions), or on the distribution of power and responsibilities
among the various levels of government. This notice only affects
participants and investors in Ginnie Mae guaranteed single and
multiclass securities industry. States and their political subdivisions
would not be affected.
Executive Order 12606, the Family
The General Counsel, as the Designated Official under Executive
Order 12606, the Family, has determined that this notice does not have
potential significant impact on family formation, maintenance, and
general well-being because it only affects participants and investors
in Ginnie Mae guaranteed single and multiclass securities.
Lobbying Activities
Section 13 of the Department of Housing and Urban Development Act
(42 U.S.C. 3537b) contains two provisions dealing with efforts to
influence HUD's decisions with respect to financial assistance. The
first imposes disclosure requirements on those who are typically
involved in these efforts--those who pay others to influence the award
of assistance or the taking of a management action by the Department
and those who are paid to provide the influence. The second restricts
the payment of fees to those who are paid to influence the award of HUD
assistance, if the fees are tied to the number of housing units
received or are based on the amount of assistance received, or if they
are contingent upon the receipt of assistance.
Section 13 was implemented by a final rule codified as 24 CFR part
86. If readers are involved in any efforts to influence the Department
in these ways, they are urged to read part 86, particularly the
examples contained in Appendix A of the regulation.
Any questions about that rule should be directed to the Office of
Ethics, room 2158, Department of Housing and Urban Development, 451
Seventh Street, SW., Washington, DC 20410-3000. Telephone: (202) 708-
3815; TDD: (202) 708-1112. (These are not toll-free numbers.) Forms
necessary for compliance with the rule may be obtained from the local
HUD office.
Authority: Section 309, National Housing Act (12 U.S.C. 1723).
Dated: May 20, 1994.
Dwight P. Robinson,
President.
[FR Doc. 94-12834 Filed 5-25-94; 8:45 am]
BILLING CODE 4210-01-P