The Tipping Point:
New Issuer Complexity Requires Determined Oversight

Remarks by Ted Tozer, President of Ginnie Mae
MBA National Secondary Market Conference
New York City
May 19, 2015

It’s great to be here today, and to be a part of this great industry – particularly at such a dynamic time in a market that is changing and innovating at a pace we’ve never experienced before.

If you think about how to describe the current environment, words like game changers . . . innovation . . . and disruption come to mind – and all in the most positive light. All terms that describe a climate where positive change . . . economic opportunity . . . and new ways of doing things often emerge as the result of new dynamics in a once predictable space.

Often, when change occurs, it happens incrementally over a period of time. And people notice only if it affects them personally. Then, there is a tipping point. Suddenly everyone notices the change – it’s the newest thing . . . and everybody starts talking about it.

That’s why I’m here today: To explore with you the striking changes we are all seeing in government-backed lending. Indeed, the tipping point has already occurred thanks to new players in mortgage finance Industry.  

Our traditional Prominent Issuers – for instance, Wells Fargo, Bank of America and JP Morgan Chase – have reduced their presence in mortgage lending and servicing and new entrants have come to play a more prominent role.

Let there be no misunderstanding about this trend: It is good news.

Ginnie Mae sees the development itself as being simply the appropriate functioning of the free market. We are heartened and grateful, in fact, to see the extent to which private capital sees opportunity in mortgage servicing rights – because it takes a lot of qualified capacity to service $1.5 trillion in MBS.

Not only that, but the new entrants are creating innovation in the marketplace that is welcome. Even more important for the market – they are creating more competition.

From where I sit, the more competition there is, the less chance there is of “too big to fail” situation occurring. This slide gives a few of the benefits these new players create:

• they improve access to credit for home buyers,
• they increase competition,  
• they enhance innovation, 
• they help spread risk throughout the capital markets; and 
• they provide more outlets for Ginnie Mae to transfer servicing in case of Issuer default

While market participants are changing, Ginnie Mae’s priorities remain the same. Our number one concern is still making sure the Issuers of our guaranteed MBS have the operational and financial strength to meet their debt obligations to bond holders.

We constantly assess the ability of our Issuers:

• to make timely payments to investors; 
• to adequately service loans that are current or in default;

It also means ensuring our Issuers have sufficient capital, and most important of all, that our Issuers have enough liquidity to make advances to bond holders when loans become delinquent.

From our vantage point, that’s pretty similar to what regulators do.

That’s not well understood. Often, people lump Ginnie Mae in with Fannie Mae and Freddie Mac, thinking that what GSEs do in the secondary market for conventional loans, Ginnie Mae does for government loans.

Sure, the GSE and Ginnie Mae guarantee MBS. But we have different levels of protection before our capital is at risk including homeowner equity and credit enhancement purchased for the issuers benefit and in Ginnie Mae’s case 100 percent of the Issuers capital.

But that’s about where the similarities end.

Unlike the GSEs, Ginnie Mae is neither the security issuer nor the master servicer. It is our approved financial institutions – we call them “Issuers” because just like Fannie and Freddie, they issue MBS. GSEs function like Ginnie Mae Issuers. And it is our Issuers’ performance that we are guaranteeing to investors.

The difference is Ginnie Mae oversees the Financial and Operational soundness of our Issuers to protect the government guarantee. We perform that role similar to the way the FDIC oversees banks to protect its guarantee on deposits.

While the market has been changing over the last few years, it is only that in the last year we’ve all realized that we are in a new market environment.

Ginnie Mae has experienced significant growth in the number of our Issuers since I became President in 2010.

Without their entrance into the market, we could have experienced a 33 percent decline in credit availability because of reduced Issuance of Ginnie Mae Guaranteed MBS between 2010 and today. The engine behind this growth is the new entrants, as this next chart demonstrates.

Rather than declining, we’ve experienced remarkable growth in MBS guaranteed.

It took four decades for our outstanding GUARANTEES TO reach $1 Trillion. It took just four more years for it to reach $1.5 Trillion.

So I will say it again: having new Ginnie Mae issuers is good news; having more Issues is even better. And we want as many Issuers as possible that can be successful in our program.

What we are focused on, then, are the implications of the trend.

The primary implications arise from elements that are for the most part new, and have to do largely with the way the emerging institutions are financed.

They are structured, and they fund their operations, in ways that are more complex and not as well tested as more traditional approaches. These characteristics in turn could have an impact how these institutions perform under stress.

An example of this is our Acknowledgement Agreement, by which Ginnie Mae MSRs are allowed to be pledged as collateral in a financing. Acknowledgement agreements are designed to reduce Ginnie Mae’s risk while increasing liquidity for our Issuers. Their creation demonstrates our commitment to keeping these new entrants competitive. But if Ginnie Mae doesn’t have sufficient resources to manage the agreements, it could actually increase our risks.

Like the financial structure of many new entrants, Ginnie Mae’s risk assessment challenges are more complex than ever before.

For instance, in the case of those acknowledgment agreements, we think the liquidity they help add to the housing finance system will help reduce the possibility of issuer failure. We will therefore continue to invest resources in supporting their use. But as use and demand for the agreements become more sophisticated, we are becoming more rigorous in how we assess individual requests. Moreover, the approval process for acknowledgement agreements will take longer with insufficient resources.

Of Course, acknowledgment agreements aren’t the only financing tools we monitor. Issuers are using a variety of tools to build capital and liquidity and cutting-edge innovators are slicing and dicing servicing duties in ever-new ways.

For Ginnie Mae, the challenge is that examining these new risks is not part of our historical practices. We are working to fully develop the infrastructure to do so.

We are making strides to get a better handle on our Issuers to ensure the integrity of the Ginnie Mae security. Last year, we tightened capital and increased liquidity standards; this year, we launched our Issuer Operational Performance Profile – or I.O.P.P – to help Issuers see how they stack up with their competitors; and we are considering seeking more frequent financial information from our Issuers in an effort to help mitigate risk and enhance transparency.

But to accomplish all of this will take a significant increase in resources.

And that’s another challenge altogether.

Our staff at Ginnie Mae is small but our staffing needs are large and getting larger for the reasons I’ve outlined today.

And no matter the amount of profits we return to Treasury each year – and our profits have averaged over 900 million dollars the past 5 years – our funding for staff comes from congressional appropriations.

This would be a good time for me to note how appreciative Ginnie Mae is of the support MBA has actively and publicly provided on our behalf for additional funding.

So what happens if our funding remains flat? What does this mean for Ginnie Mae? What does this mean for you and our Issuers?

Our team must be prepared to answer those questions in the very near future if our funding needs do not keep up with changes in the industry. I don’t have an answer for you today but we will take whatever steps are necessary to ensure our guarantee and protect American taxpayers from losses that could come as a result of insufficient oversight of risks.

Let me end on a positive note. Together, Ginnie Mae and mortgage bankers kept the dream of home ownership alive for American homebuyers during the worst financial crisis of our lifetimes. You turned to Ginnie Mae when other sources of capital vanished and we, in turn, opened our doors to many innovative new entrants to keep the market flush with liquidity.

In that same spirit, let’s move forward to tackle new challenges, to meet the needs of tomorrow’s home buyers, and to help secure a solid financial future for all Americans … in our cities … in rural areas … and for our veterans.