[Federal Register Volume 71, Number 107 (Monday, June 5, 2006)]
[Rules and Regulations]
[Pages 32388-32390]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-8636]



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Part II





Department of Housing and Urban Development





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24 CFR Part 320



Government National Mortgage Association: Excess Yield Securities; 
Final Rule

  Federal Register / Vol. 71, No. 107 / Monday, June 5, 2006 / Rules 
and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 320

[Docket No. FR-4958-F-02]
RIN 2503-AA18


Government National Mortgage Association: Excess Yield Securities

AGENCY: Government National Mortgage Association, HUD.

ACTION: Final rule.

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SUMMARY: The Government National Mortgage Association (Ginnie Mae) has 
developed a new program under which Ginnie Mae will guarantee 
securities backed by the excess servicing income relating to one or 
more mortgage pools or loan packages underlying previously issued 
Ginnie Mae mortgage-backed securities (Excess Yield Securities). This 
final rule clarifies the authority of Ginnie Mae to guarantee this new 
product and establishes a new regulation that defines Excess Yield 
Securities and sets out the Ginnie Mae guaranty. This final rule 
follows publication of a September 14, 2005, proposed rule and public 
comment period. After Ginnie Mae's careful consideration of the public 
comment received, the proposed rule is being adopted without change.

DATES: Effective Date: July 5, 2006.

FOR FURTHER INFORMATION CONTACT: Stephen L. Ledbetter, Director, 
Securities Policy and Research, Government National Mortgage 
Association, 451 Seventh Street, SW., Room B-133, Washington, DC 20410; 
telephone (202) 401-8970 (this is not a toll-free number). Individuals 
with speech or hearing impairments may access this number through TTY 
by calling the toll-free Federal Information Relay Service at (800) 
877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    In order to further its statutory mission of expanding affordable 
housing in America by linking domestic and global capital markets to 
the nation's housing markets, Ginnie Mae, operating under its current 
legal authority, proposed to implement an Excess Yield Securities 
program (Excess Yield Program) by providing its guaranty to interest-
only securities backed by a portion of the servicing fee that is paid 
out of the monthly cash flows from government-insured or government-
guaranteed mortgage loans backing previously issued Ginnie Mae-
guaranteed mortgage-backed securities. The cash flows backing the 
Excess Yield Securities would be that portion of a qualifying issuer's 
servicing cash flows with respect to the related mortgage pools or loan 
packages that is greater than the minimum amount of servicing required 
by Ginnie Mae. The Excess Yield Securities would be ``based on and 
backed by a trust or pool composed of mortgages which are insured under 
the National Housing Act'' and would therefore be eligible for guaranty 
as authorized by 12 U.S.C. 1721(g)(1), just as their related Ginnie 
Mae-guaranteed mortgage-backed securities are.
    Under the program, servicing cash flows would be pooled and would 
back securities guaranteed by Ginnie Mae and upon which Ginnie Mae 
would charge a guaranty fee pursuant to 12 U.S.C. 1721(g)(1) and 24 CFR 
320 of the implementing regulations. The guarantee fee would be no more 
than six basis points, as stipulated by 12 U.S.C. 1721(g)(3)(A). 
Although a guaranty fee has been assessed against related mortgage-
backed securities previously guaranteed by Ginnie Mae, the servicing 
cash flows that serve as the collateral for these new securities have 
not backed securities upon which a fee has been assessed.
    The Excess Yield Program was introduced as a proposed rule in order 
to provide an opportunity for public notice and comment before 
implementation of it as a new program. The proposed rule, published 
September 14, 2005 (70 FR 54449), sought to affirm Ginnie Mae's 
authority to guarantee Excess Yield Securities, to charge guaranty fees 
for such guarantees, and to revise Ginnie Mae's authorizing regulations 
to clarify their application to the Excess Yield Program.
    The Excess Yield Program will allow qualifying Ginnie Mae issuers 
to reduce the amount of mortgage servicing rights on their balance 
sheets, which should reduce the amount of capital they are required to 
hold against that asset. The program will also reduce issuers' need to 
use costly hedging tools to hedge against fluctuations in the value of 
their mortgage-servicing rights. As a result of the program, the 
liquidity of mortgage-servicing rights for Ginnie Mae issuers will 
increase, resulting in lower costs to issuers and encouraging the 
origination of government-insured and government-guaranteed loans that 
back Ginnie Mae mortgage-backed securities. This program will directly 
benefit low- and moderate-income borrowers and further Ginnie Mae's 
mission.
    Overall, the program will generate benefits for investors, lenders, 
issuers, low- and moderate-income borrowers, and Ginnie Mae. Ginnie Mae 
will establish appropriate safeguards to mitigate risks involved. Such 
safeguards will include, among other factors, a review of issuer 
competence and financial condition prior to allowing issuers to 
participate in the program. Ongoing monitoring procedures will minimize 
operational risks. Investor participation will be limited to 
institutions that meet the requirements to be classified as accredited 
institutional investors, thus protecting less sophisticated investors 
from the risks associated with interest-only securities. Commitment and 
guaranty fees will generate revenue to pay the costs of the program.
    The September 14, 2005, rule proposed to add a new section (Sec.  
320.8) to HUD's regulations governing the guaranty of mortgage-backed 
securities. Section 320.8 included a definition of Excess Yield 
Securities and specified that Ginnie Mae will guarantee the timely 
payment of interest, as provided by the terms of the security.
    See the preamble to the September 14, 2005, proposed rule for a 
description of the Excess Yield Program and related regulatory 
amendments.

II. This Final Rule

    This final rule follows publication of the September 14, 2005, 
proposed rule, and takes into consideration the public comment received 
on the proposed rule. After careful review of the public comment, HUD 
has decided to adopt the September 14, 2005, rule as final without 
change.

III. Discussion of Public Comments on the September 14, 2005, Proposed 
Rule

    The public comment period on the proposed rule closed on November 
14, 2005. HUD received one public comment in response to the proposed 
rule. The comment was received from a subsidiary of a financial 
services retailer. This section of the preamble presents a summary of 
the significant issues raised by the public commenter on the September 
14, 2005, proposed rule, and Ginnie Mae's response to these issues.
    Comment: Support for the Excess Yield Program. The commenter wrote 
that the issuance of Excess Yield Securities will make Ginnie Mae 
securities more attractive in the marketplace, as well as make the 
underlying loans more affordable to borrowers applying for Federal 
Housing Administration (FHA)-insured and Veterans Administration (VA)-
guaranteed loans.
    HUD Response: HUD agrees with this comment.
    Comment: The minimum service fee for Ginnie Mae I mortgage-backed

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securities should be restructured in order to accommodate the Excess 
Yield Program. The commenter advocated expanding the program to include 
securities backed by excess servicing income earned from loans backing 
restructured Ginnie Mae I securities. The commenter wrote that this 
would create a more liquid market for Excess Yield Securities by 
increasing the potential market size, and generate more revenue for 
Ginnie Mae.
    HUD Response: The Ginnie Mae I security, as currently structured, 
has no excess servicing because each loan backing a Ginnie Mae I 
security is required to have exactly 44 basis points of servicing. This 
requirement is communicated to, and understood by, investors, and is an 
important reason why the Ginnie Mae I security trades well in the 
secondary market. As a result, if Ginnie Mae were to restructure the 
Ginnie Mae I security to allow for the sale of a portion of that 44 
basis points of servicing, the change could only apply prospectively, 
would require a change to the Bond Market Association's ``good delivery 
guidelines'' for trading in the TBA (``to be announced'') market, and 
might cause a dislocation in the trading of the security. To avoid such 
dislocation, Ginnie Mae is currently contemplating allowing excess 
servicing only from Ginnie Mae II securities to back the Excess Yield 
Securities.
    Comment: Ginnie Mae correctly assessed that the Excess Yield 
Program would directly benefit low- and moderate-income borrowers by 
lowering the costs of and encouraging the origination of government-
backed loans. The commenter agreed with the assertion in the proposed 
rule that issuers would experience a reduction in the amount of capital 
needed to hold the mortgage-servicing asset and the cost to hedge it. 
The commenter also wrote that Excess Yield Securities would complement 
other efforts by Ginnie Mae to lower the cost of funds available to 
low- and moderate-income borrowers.
    HUD Response: HUD agrees with this comment.
    Comment: The Excess Yield guaranty fee should be significantly less 
than six basis points. The commenter wrote that for Ginnie Mae II pools 
issued since July 2003, the average amount of excess servicing produced 
monthly has ranged from approximately 15 to 25 basis points. The 
commenter reasoned that in relation to the ``standard'' six basis 
points Ginnie Mae guaranty fee that covers the full security coupon, 
the market clearing level for an Excess Yield Security guaranty fee 
should be significantly less than six basis points. The commenter 
defined the market clearing level as the level of guaranty fee that 
induces participants to create Excess Yield Securities rather than 
retaining those cash flows.
    HUD Response: Ginnie Mae will determine the appropriate guaranty 
fee to assess for its guaranty of Excess Yield Securities, based upon 
the risks to Ginnie Mae, and subject to the statutory limit of six 
basis points.
    Comment: It would be beneficial to the marketplace for Ginnie Mae 
to communicate, as early as possible, the eligibility requirements for 
participation in the Excess Yield Program. The commenter wrote that a 
commitment to transparency would allow issuers to determine their 
eligibility and how to best conduct their issuance activities in the 
future.
    HUD Response: Ginnie Mae is committed to being an open and 
transparent organization, and will provide clear guidance to the market 
prior to rolling out the Excess Yield Program.

IV. Findings and Certifications

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and the private sector. This final rule does not 
impose any federal mandate on any state, local, or tribal government, 
or the private sector, within the meaning of UMRA.

Environmental Impact

    This final rule does not direct, provide for assistance or loan and 
mortgage insurance for, or otherwise govern or regulate, real property 
acquisition, disposition, leasing, rehabilitation, alteration, 
demolition, or new construction, or establish, revise, or provide for 
standards for construction or construction materials, manufactured 
housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(1), this 
final rule is categorically excluded from environmental review under 
the National Environmental Policy Act of 1969 (42 U.S.C. 4321).

Regulatory Flexibility Act

    The Secretary has reviewed this rule before publication and, by 
approving it, certifies, in accordance with the Regulatory Flexibility 
Act (5 U.S.C. 605(b)), that this rule would not have a significant 
economic impact on a substantial number of small entities. The final 
rule affirms and clarifies the authority of Ginnie Mae to guarantee a 
type of security it had not previously guaranteed and, as such, has no 
impact on entities in which the size of entities is a relevant 
consideration. Accordingly, the undersigned certifies that this final 
rule would not have a significant economic impact on a substantial 
number of small entities.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on state and local governments and 
is not required by statute, or preempts state law, unless the relevant 
requirements of Section 6 of the executive order are met. This rule 
does not have federalism implications and does not impose substantial 
direct compliance costs on state and local governments or preempt state 
law within the meaning of the executive order.

Executive Order 12866, Regulatory Planning and Review

    OMB reviewed this rule under Executive Order 12866 (entitled 
``Regulatory Planning and Review''). OMB determined that this rule is a 
``significant regulatory action,'' as defined in Section 3(f) of the 
executive order (although not economically significant, as provided in 
Section 3(f)(1) of the executive order). Any changes made to the rule 
subsequent to its submission to OMB are identified in the docket file, 
which is available for public inspection in the Regulations Division, 
Office of the General Counsel, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Room 10276, Washington, DC 20410-
0500.

List of Subjects in 24 CFR Part 320

    Mortgages, Securities.


0
Accordingly, HUD amends 24 CFR part 320 as follows:

PART 320--GUARANTY OF MORTGAGE-BACKED SECURITIES

0
1. The authority citation for 24 CFR part 320 continues to read as 
follows:

    Authority: 12 U.S.C. 1721(g) and 1723a(a); and 42 U.S.C. 
3535(d).


0
2. Add Sec.  320.8 to read as follows:


Sec.  320.8  Excess Yield Securities.

    (a) Definition. Excess Yield Securities are securities backed by 
the excess servicing income relating to mortgages

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underlying previously issued Ginnie Mae mortgage-backed securities.
    (b) GNMA guaranty. The Association guarantees the timely payment of 
interest as provided by the terms of the security.

    Dated: May 23, 2006.
Michael J. Frenz,
Executive Vice President.
[FR Doc. E6-8636 Filed 6-2-06; 8:45 am]
BILLING CODE 4210-67-P