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Float loss.

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. Up until this point, issuers were mailing separate remittance checks to each GNMA I security holder. Remittance checks are required by GNMA to be mailed in a time frame such that a check could reasonably be expected to be received by the security holder by the 15th of the month. One MBA member reviewed old bank statements from seven months and eight months after the PTC started operations. The breakdown on check clearance showed that mortgage bankers were getting two or more days of float on a large percentage of GNMA I remittance checks.

Then, in an All Participants Memorandum dated May 24, 1990, GNMA mandated that all securities with an issue date on or after July 1, 1990, including ARM securities, but excluding construction loan and serial note securities, be issued through the PTC. Consequently, as new GNMA I securities are issued, the percentage of securities held by the PTC grows accordingly. Essentially, every month mortgage bankers are giving up a greater dollar amount of float to the PTC as larger and larger checks are going to the PTC.

In an All Participants Memorandum dated June 19, 1990, GNMA made available and urged the use of voluntary ACH or wire transfer procedures for GNMA securities or, at least, a consolidated check procedure. Remittance checks are made payable to the PTC and mailed via overnight service on the 14th so that PTC has remittances in hand on the 15th of the month. The PTC is able to deposit virtually all checks on the day of receipt so that good funds are available on the 16th of the month. This allows issuers to enjoy the benefit of float on those funds through the 15th of the month.

Clearly, the industry has given up float incrementally since the inception of the MBSCC. Even though about 40 percent of all issuers have voluntarily agreed to wire their GNMA I remittances to the PTC on the 15th of the month or have the funds debited, the impending mandatory ACH debit will still have a dramatic impact on a large number of issuers. MBA has calculated, based on the actual remitances of a group of issuers, that the amount lost on one day of float equates to approximately 0.01 percent or one basis point of the amount remitted to the PTC.

Aside from the loss of interest income on a monthly basis, there is also the value of GNMA servicing to consider. When servicing portfolios are priced for acquisition, the pricing models compute a value for the average deposits. This is the average monthly balance of P&I plus T&I in the accounts. If accounts are debited effective on the 15th, average deposits would decrease. This would adversely affect the value of GNMA servicing portfolios. As the mandatory ACH debit will not apply to GNMA I securities already in existence when the mandatory ACH requirement becomes effective, the value of existing servicing will not be affected. However, there is the possibility that going forward, the GNMA I servicing may be less valuable.

MBA has asked GNMA to consider both the loss of float to issuers and the possible decrease in GNMA servicing value when finalizing the details of the REMIC program. We are exploring several ways in which issuers could be compensated for the losses that are expected if the debit cannot be initiated on the 15th and settled on the 16th. GNMA should counterbalance the adverse effects of a change in payment method by a guaranty fee adjustment, additional services from GNMA, relaxed pooling restrictions or some combination thereof.
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Title Annotation:Participants Trust Co.
Author:Froass, Rebecca E.
Publication:Mortgage Banking
Article Type:Column
Date:Jun 1, 1993
Words:1192
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