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Stakeholder Letters

Ginnie Mae Adapts as Aftermath of Financial Crisis Leads to Dramatic Change in Housing Finance Industry
Published Date: 11/28/2014 1:00 AM

The 2007 and 2008 financial crisis continues to transform the housing finance industry, forcing many banking institutions to retreat from mortgage lending and servicing. By contrast, the Ginnie Mae mortgage-backed securities (MBS) program has more than doubled in size as government-backed securities were essentially the only means of providing market liquidity. Indeed, Ginnie Mae thrived; beginning in 2007, Ginnie Mae’s issuance by market share jumped from about three percent prior to the crisis to 24 percent in 2009, and has remained around 20 percent between 2010 and today.

Ginnie Mae Issuance by Market Share

Ginnie Mae Issuance By Market Share
Source: Inside Mortgage Finance and FBR Research



However, this housing industry transformation presents challenges to many institutions, including Ginnie Mae. Though some aspects of the transformation are far from clear, one thing has become clear: large commercial banks have retreated from home lending and servicing.

 
The Retreat of Commercial Banks
 
The Retreat of Commercial Banks

Source: Company documents and Inside Mortgage Finance


In the early stages of the financial crisis, many envisioned a future state in which mortgage lending would be heavily regulated, tying it more directly to traditional commercial banking institutions. Instead, banks weighed the costs and benefits of housing finance and determined that housing finance was too risky and that less exposure was the better course for their institutions. Three factors can be considered as primary drivers of the post-crisis retreat of banks:

  • The impending imposition of capital standards (via the Basel III standard) that could have the effect of penalizing the ownership of Master Servicing Rights.
  • A recognition that the servicing organizations that banks had constructed over time were inadequate to the current era of high numbers of defaulted loans and more onerous regulatory standards. And additionally, an accompanying unwillingness to invest in the re-engineering that would be necessary to change this.
  • The incurrence of enormous retroactive costs, in the form of settlements and penalties that have made mortgage servicing appear to be a much more challenging and economically uncertain business line than had been believed to be the case.

This retreat of commercial banks has led to what we are calling an “Era of Transformation” in which non-depository institutions -- many of them relatively new -- and with more complex financial and operational structures, are stepping in to fill the void created by the commercial banks’ retreat. The result is a dramatically different operating environment, an environment the Ginnie Mae program was not designed to support. To continue to meet its mission, Ginnie Mae must take steps to address the utility and relevance of the MBS program in this changing environment.

In our recent white paper, An Era of Transformation, we examine how we will manage and adapt to the rapid, substantial increase in the presence of non-depository institutions. This paper sets forth Ginnie Mae’s approach to effectively managing these new institutions, through the development of five Strategic Views that explain Ginnie Mae’s focus, in terms of both the perspectives that will drive its actions and the specific initiatives that will shape its future.

Strategic View I- Policymakers must give proper weight to the preservation of residential mortgage servicing as an economically viable activity, and mortgage servicing rights (MSRs) as an attractive asset class.

Strategic View II- Ginnie Mae will modify its MBS program to support the evolving residential finance marketplace, including the rise non-depository lenders, and broaden access to its program through non-traditional structures.

Strategic View III- To meet the changing risk profile of this transformation, Ginnie Mae will upgrade its ability to assess and promote the financial and operating capability of its issuers, with a focus on liquidity, MSR valuations, and information-driven operational benchmarks.

Strategic View IV- Ginnie Mae’s strategic efforts will focus on providing for market liquidity, with an emphasis on providing liquidity in servicing–related activities and the marketplace for mortgage servicing rights.

Strategic View V- To preserve the integrity and sound administration of its MBS program, Ginnie Mae will act assertively to maintain program compliance, and – in cases of issuer failure – will seek to relocate MSR portfolios to alternative approved.

By balancing the modification of the MBS program and securitization platform to meet changing conditions and maintaining the key principles and features that have contributed to its long-term success, Ginnie Mae will assure that its contribution to the health of the U.S. housing finance market will continue for many years to come.