[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]


-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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