Skip Ribbon Commands
Skip to main content

Speeches

Remarks by Michael Drayne from the 2012 MBA Annual Convention & Expo
Published Date: 12/3/2012

​Remarks of Michael Drayne, Senior Vice President, Office of Issuer and Portfolio Management, Ginnie Mae
 
“The Secondary Market and Mortgage Servicing Rights: Best Execution, Asset Management and Agency Viewpoints”
 
Tuesday, Oct. 23, 2012
Mortgage Bankers Association Annual Convention & Expo
Chicago, Illinois
 
Ginnie Mae’s business model is somewhat simpler than that of the government-sponsored enterprises (GSEs). We simply guarantee pass-throughs from lenders, who we call “Issuers,” to security holders. A huge amount of our business is therefore counter-party risk management. The basic principles that inform our view of things really don’t change very much. What is changing are the tools we use as we are given more resources to work with in terms of staff. I’ll describe some of the ways this increase in resources is changing what we do.

The composition of the overall Ginnie Mae portfolio of guaranteed mortgage servicing rights (MSRs) that sit underneath the securities outstanding is actually changing significantly. As an example, if you look at an 18-month period going back a year from today and ending six months from today, a year ago our top 13 Issuers, the three megabank servicers, and then the next 10, their portfolio made up 90% of the total Ginnie Mae portfolio. And over this 18-month period, ending a half-year from now, I would estimate the total Ginnie Mae portfolio will increase by about $150 billion in securities outstanding.
 
That might be a little conservative, but I think it’s reasonably correct. So if the market share that existed a year ago was to have persisted, those top 13 lenders I referred to, their portfolios would increase by about $135 billion. And looking forward six months from now, I’m projecting as best I can, not only will those 13 not have had their Ginnie portfolios increased by $135 billion, I don’t think they’ll increase at all. In fact, I think the likelihood is that their portfolios will actually be a little bit smaller in the aggregate than they were a year ago, at a time when the total was growing quite a bit.
 
That means about $135 billion will have shifted from large, established, very experienced, regulated Issuers into other hands – largely newer, in many cases smaller, and comparatively less regulated. That is 10% of the total outstanding Ginnie Mae portfolio, not 10% of a single year’s originations. That is a significant change for us on a portfolio of that size. And, we are trying to innovate in different ways to handle that change responsibly.
 
I would characterize there being two different flavors of this change in composition that I mentioned. One of them is your traditional, stand-alone, self-financed mortgage banker who has decided they want to start increasing their servicing portfolio. We’re seeing a lot of that.
 
The other situation that is newer – and that we’re spending a lot of time on – is new participants in the mortgage market, specifically those who want to hold mortgage servicing rights, who are different in that they are essentially conduits for investments. For example, Nationstar is both of those things. And that really presents some different issues for us. One thing we pay attention to when working with parties who have an interest in getting involved in the Ginnie Mae program, is making sure they understand that regardless of the business arrangements that govern how the economics from their investment in servicing rights are passed through to other investors, Ginnie Mae still requires a single counter-party facing us that can reliably perform all of their functions under the program. That sounds straightforward, and to us it is straightforward, but it’s an area where we have a lot of conversation.
 
Basically the two fundamental areas that we focus on, and that determine our relationship with Issuers, are simply the need for us to be sure our Issuers have the experience, knowledge, and staff to be able to do what they are required and are competent to perform successfully under the program. We now routinely perform, in addition to the strictly compliance-oriented Issuer reviews that we’ve done for many years, a different kind of review where we look at the business plan, the management depth, and the servicing, reporting, and government production expertise of Issuers. We look at their business process; we look at their infrastructure; their ability to invest; and, we make an assessment about how effectively they will perform under the program.
 
Similarly, in the area of financial strength – which is of critical importance because we are guaranteeing to the security holders they will get their payments, even if the Issuer should fail to make the payments – historically, we’ve always made heavy use of the annual audited financials that are submitted to us by Issuers. These financials drive how much in commitment authority we grant to an Issuer at any given time. Now, we’re starting to look more carefully at quarterly financials and understand in more detail what is happening financially with an Issuer. We only have a couple hundred active Issuers, so it’s easier for us to keep track of what’s going on financially. We’re being more proactive about looking for bad earnings or issues that would suggest any weakening of an Issuer’s ability to make the pass-throughs they need to under the program.
 
Another thing we’re looking at is developing metrics to enable us to have a more direct understanding about the cash flows within their business. For example, we’re starting to look at the ratio of monthly servicing fees earned by an Issuer to the monthly advances they need to disburse because of delinquent loans. And looking at how those ratios compare from one Issuer to another, or how they are changing over time for a current Issuer, is going to give us a more direct view into the financial position and performance of these Issuers than we have had by solely relying on our traditional means of looking at broad-based delinquency measures and how much somebody’s entire portfolio is delinquent based on their audited annual reports. Trying to get right down to what is happening in the finances of an Issuer is really our whole job. We guarantee these payments are going to be made, and if they are not made, we have to make them, which then become an expense to the taxpayer.
 
So our view of what our role is and the addition of the enhanced resources that I mentioned, is enabling us to go into some different directions that we think give us a better view of this important area.
 
Thank you.