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Remarks by Gregory Keith from the 2012 Mortgage Bankers Association Accounting and Financial Management Conference
Published Date: 11/15/2012
​Remarks of Gregory A. Keith, Senior Vice President and Chief Risk Officer, Ginnie Mae
 
“General Session: U.S. Version of Basel III – Status of an Unpopular Proposal”
 
Thursday, Nov. 15, 2012
Mortgage Bankers Association Accounting and Financial Management Conference
San Diego, California
 
Good morning, everybody. Since I’m from San Diego, this was a pleasure to come to speak to you. And it’s also my pleasure to give you some perspective as to why Ginnie Mae’s view of Basel is complicated.
 
In 2011 we were able to return $1.2 billion in earnings to the tax payers. This year, we are returning $609 million. We’re pretty proud of our ability to, through the credit crisis, continue to protect the taxpayers as well as deliver monies back to the Treasury. We’ve also created a mortgage-backed security product that is desired around the world. Pension funds, mutual funds, and sovereign banks all desire the Ginnie Mae security and have come to value it as an opportunity to get an attractive yield while continuing to have the safety of the U.S. Treasury.
 
We have over 8.5 million loans currently outstanding, allowing us to provide millions of opportunities for homeowners to either purchase a home or re-finance to a much more attractive rate. At the same time, we’ve also been able to provide thousands of affordable, clean, and sanitary multi-family units that millions more of Americans can use to meet their housing needs. All of these things are part of our mandate to be a counter-cyclical provider of the liquidity to the market. We’re here to ensure that Americans have these opportunities, and it certainly shapes some of our views relative to Basel.
 
I’m here to help you understand why Basel would influence some of our thinking. If you talk about where we stack ourselves in the loss paradigm, first the homeowner’s equity has to be extinguished; then the insurance that is on the loans either from the FHA, VA, or USDA has to be exhausted; and, the last thing, the corporate resources of the lender have to be used up. This is a little different than Fannie Mae or Freddie Mac. Our lenders are the Issuers of the security. They are expected to advance principal interest to the bond holders for as long as that loan is in the pool, which can be up until the time of foreclosure. They have an opportunity to submit for a claim and we all know that today that could be upwards to two years. But, we have the lender’s capital in front of us and their access to liquidity to provide support. It’s only when all three of those layers of enhancement are exhausted that we step in. So you can see that counterparty risk is pretty important to us.
 
Let’s talk about 2008. I didn’t get a lot of sleep. At the time, I was managing a $6 billion exposure book to the likes of Wachovia, Citibank, AIG, Lehman, IndyMac, and Sovereign Bank. While normally all of those sounded like great counter parties, I was scared. I was very scared. And luckily there was some bold intervention by the U.S. government in the form of TARP, as well as other actions taken by the Treasury that ultimately allowed us to go relatively unscathed.
 
So despite Sheila Bair being a little bit out of favor right now in Washington, certain things that she says make sense to me. They resonate. The idea that we need more and higher-quality capital; that we need to ensure there is adequate liquidity; and, a diminuation of some of the interconnectivity of the banks that created a huge amount of counterparty risks. We all know, for example, that AIG did not fail because it ran out of cash; it was in jeopardy because of its interconnectivity to so many other institutions. Those things resonate with us at Ginnie Mae. The idea that we would have counter parties that are strong but well capitalized and have access to adequate liquidity is attractive.
 
But here’s the other side. If our mandate is to provide liquidity to the market, some of the things that Dennis [Hild] and Jim have talked about are somewhat troublesome for us. For example, the limitations on how much MSRs can constitute a bank’s capital as well as the weightings that are placed on that if it exceeds certain thresholds. And secondly, the servicing advances which are used to fund the advances to bond holders and the punitive allocation of capital on those, again, is counterproductive to banks providing liquidity to the mortgage market. You can see we are interested in having strong counter parties, but at the same time there are things that are less attractive, at least to Ginnie Mae.
 
One of the things that we are seeing is a migration from well-capitalized depositories to the independent mortgage bankers, which often have a much more modest level of capital. I can’t contribute it entirely to Basel, though some of it is most definitely Basel III- related; some of it is AG settlements and the impact that’s having on banks; and, some of it may be mortgage fatigue at some of these banks. Certainly the aggressive nature of the U.S. Attorney’s Office going after mortgage fraud has made people a little bit wary. And, since we are relying on our lenders to be the buffer between the taxpayer incurring a loss, this is important to us.
 
From 2010 to 2012, independent mortgage bankers have more than doubled, or almost more than doubled, their percentage of our total business and our issuance. What we are seeing is that more independent mortgage bankers are absorbing some of the volume that is being discontinued because of folks like MetLife, Bank of America, and others discontinuing some of their correspondent programs as well as other parties moving away from that market. A lot of our new Issuer applicants are hedge funds, private equity funds and while those represent significant sources of capital that are coming to the mortgage market, one of the challenges with them is that they are less-regulated than other depositories and even to some degree less-regulated than independent mortgage bankers. Additionally, the capital is often times conserved and is not in the enterprise from the beginning. And the third point is the structures often give the capital an opportunity to exit the business a little easier than we might like.
 
I have had some of our folks tell me that what seems to be the problem with Basel III and migration away from the banks is it’s going back to the way it was in the 90s, when we had independent mortgage bankers. I would make the argument that it’s different than it was then. In 1995, three of the top five mortgage servicers were not depositories – Countrywide, GE, and Prudential Home Mortgage. GE and Prudential were subsidiaries of large, well-capitalized institutions that had brands and significant reputational risk. And similarly, Countrywide was a publicly traded company that had access to capital markets in broad ways. It’s very different than the profile of the folks that are now applying to become our Issuers. So it is a little bit different.
 
Certainly this is one of the things that keep me up at night – ensuring that we have strong counter parties out there and that the structure is productive and encourages the accumulation of capital and liquidity to be able to be the strong Issuer that we desire.
 
Thanks very much.