As non-banks have grown to become the largest segment of Ginnie Mae’s Issuer base, how Issuers use their mortgage servicing rights (MSR) has also grown in importance, as it is often the largest asset on the balance sheet for non-banks. This is at the forefront of Issuers’ minds because it is increasingly crucial to use as many tools as possible to generate working capital to manage business operations. Therefore, having the flexibility to use MSRs to shore up cash flow becomes more imperative than ever.
As of late, Ginnie Mae has taken strides to evolve advance financing options of Ginnie Mae MSRs. Top of the list is making our Acknowledgement Agreement more user-friendly for lenders and working with them to facilitate prudent lending on MSRs.
Liquidity boosts value and strengthens counterparties
In 2017, as part of an effort to promote liquidity, Ginnie Mae, along with Credit Suisse and PennyMac, helped introduce the first MSR financing securitization transaction. Since then, we have executed four more securitization transactions. Overseen by an independent credit manager that provides detailed monthly reporting, these innovative securitization transactions are important to Issuers and Ginnie Mae for a number of reasons because they:
- Provide more stable long-term funding (five-plus years).
- Broaden the lender base by bringing in institutional investors.
- Lower the cost of funds by 200 to 300 basis points.
In addition to offering securitization transactions, we aim to increase Issuers’ liquidity options at times of stress. To that end, while historically we have only allowed lending against MSRs, we’re now working out the policy issues to allow lending against servicing advances, in limited circumstances.
Strengthening the value of the asset
As we move forward, we’re keeping the greater context of the market in mind. MSR pricing is tied to interest rates, which means greater stress in the market when interests rates are volatile, as they have been recently. Through conversations at industry conferences and discussions with Issuers, I’ve learned that several MSR deals were put on hold until pricing settled down. But lately, volatility has subsided, and that suggests investors may be taking new looks at entering the Ginnie Mae MSR market. The additional demand could help the value of an Issuer’s MSR portfolio, and that’s a welcome trend.
In addition, Ginnie Mae published a Request for Input (RFI) related to pooling selected VA guaranteed mortgages earlier this month. These higher-LTV VA mortgages have been prepaying at faster rates than economic conditions would predict, damaging the value and liquidity of all high-percentage VA MSRs in the market, while depressing the value of all Ginnie Mae MBS.
We are currently reviewing responses from the industry on the RFI yet there is more to do. As we continue to improve our program, we know how important it is to maintain open dialogue with our industry partners. I’m moderating a panel on MSR liquidity at the upcoming Ginnie Mae Summit and I look forward to engaging with our customers there.