Earlier this year, Ginnie Mae moved to make it more difficult for financial institutions to issue HECM reverse mortgage-backed securities (HMBS). As I’ll explain below, this could have serious implications for the reverse mortgage industry, and exacerbate the slowdown in lending that is already underway.

Ginnie Mae performs the same function for reverse mortgage lending that Freddie Mac and Fannie Mae perform for conventional mortgage lending. By purchasing (reverse) mortgage-backed securities, Ginnie Mae indirectly relieves lenders of their capital commitments and enables them to originate new loans. If not for Ginnie Mae specifically and the MBS system in general, mortgage lending would be significantly more risky for lenders, and necessitate stricter standards and higher costs for borrowers.

HECM reverse mortgages are partially immune from this problem since they are necessarily insured by HUD. In other words, lenders bear virtually zero risk for the loans that they underwrite, since they can ultimately file a HUD insurance claim in the event of borrower default. Still, the majority of reverse mortgage lenders remain heavily dependent on the HMBS market, because they couldn’t possibly commit enough capital to underwrite all the reverse mortgages themselves. ($100,000/reverse mortgage X 1,000 loans per year > most reverse lenders’ lending capital).

Last year, Ginnie Mae stopped accepting new HMBS issuers in order to conduct a feasibility study of its reverse mortgage MBS operations. The purpose was to proactively address any concerns about overexposure to risk, and to avoid finding itself in the same position as the FHA’s reverse mortgage program, which had earlier teetered on the brink of insolvency. By no coincidence, reverse mortgage lending volume declined in 2010.

Now, Ginnie Mae has announced that it will resume accepting applications, but that all issuers will be subject to much higher standards beginning in October 2011. Suffice it to say that only large financial institutions (defined in terms of higher net worth, liquid assets, and capital ratio requirements) will be allowed to participate, and that fees for everyone will be higher.

In short, the good news is that things are basically back to normal with Ginnie Mae and the MBS market. The bad news is that some issuers might be reluctant/unable to participate, leading to further declines in reverse mortgage lending activity in 2011-2012.