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 ‭(Hidden)‬ Ginnie Mae Breadcrumb


Remarks by President Tozer from the Global Chinese Real Estate Congress Address
Published Date: 7/8/2015
Global Chinese Real Estate Congress Address
The Fairmont Hotel // 2401 M St NW, Washington, DC

Thank you for the generous introduction. It’s great to see many friends again. Three years ago, I spoke at your conference in Macau – thank you professor Rose Lai for inviting me there – and, of course, I want to thank Doctors Jian Chen and Tyler Yang for inviting me to address you today.

On behalf of Ginnie Mae – welcome to Washington D.C. , our nation’s capital. Thank you for honoring us with your presence and your continued interest in our mortgage finance system and our secondary market.

The Global Chinese Real Estate Congress is such a diverse and distinguished group. It is a premier platform for scholars, private developers and government officials to share current issues and future challenges.

It is my pleasure to follow my friend and colleague Dr. Ed Golding this morning. Dr. Golding and I each represent important agencies for advancing housing in the United States and we share many priorities and concerns.

A vibrant and innovative housing finance system is the cornerstone of economic prosperity in the United States … and it can be for Asia, as well.

I believe that our nations share a common interest in looking for ways to ensure safe and quality housing for all of our people.

“The American Dream” of home ownership is an aspiration for all Americans whether they live in our cities, towns or farms. This dream crosses borders and continents . . . economic structures and political ideologies.

Today, I want to discuss some of the history of U.S. government involvement in housing, the creation of a secondary market, and the TBA – “To Be Announced” market, which was started to facilitate the trading of Ginnie Mae MBS, and is critical to the success of the American housing finance system and the 30-year mortgage.

I will talk about Ginnie Mae’s two primary roles – running a single security platform and protecting the explicit government guarantee that is crucial to the existence of the 30-year mortgage market. We will also examine how market factors like our changing issuer base are affecting how we do business.

An important point to remember is that the Ginnie Mae model levels the playing field for all our issuers, because all use the same security. As the types of issuers using the model have changed and the volume of securities trading has more than doubled -- we are revising our risk management procedures and modernizing the single security platform technology. And we’ll talk more about that a little later......

First – let’s take a look at some of the events that have shaped the American housing finance system. History has shown that home ownership builds wealth over time, promotes stable communities, improves schools and encourages civic involvement.

Those are among the most important reasons the United States government has a prominent role in promoting an affordable and stable housing finance system that can weather economic and financial storms.

It wasn’t always the case that our housing markets could survive severe economic downturns. Once, the U.S. relied totally on the banking sector for mortgage finance … but that proved disastrous. Today, the key to our success in building the world’s strongest and most innovative housing finance program is a countercyclical system that relies on a public-private partnership with industry and government working together to help smooth out the booms and busts of housing cycles. A vibrant secondary market is essential to this system.

As important as government involvement is to the mortgage finance system, government should never crowd out or create unfair competition with the private capital upon which the entire system ultimately depends.

Let me begin by taking you back nearly 100 years, to a time just after the end of the first World War.

Back then homes were financed primarily by banks that specialized in mortgage lending, called Savings & Loans, which used deposits to fund balloon loans with maturities from three to five years. Loans were generally capped at loan to value of 50 percent.

In prosperous times, the requirement to refinance or repay mortgage debt within five years was simple to meet. Cities were growing . . . home prices were rising . . . and jobs were plentiful. The stock market crash on October 29, 1929, changed everything, triggering “The Great Depression.”

Overnight, jobs vanished. Borrowers couldn’t repay loans. Home prices depreciated by half. Depositors made runs on banks.

Without sufficient deposits, balloon mortgages couldn’t be refinanced … even if the home owner still had a job. The banking system became insolvent. Millions of Americans lost their homes to foreclosure. /p>

The Great Depression led to the election of President Franklin Roosevelt. Soon after taking office, his administration created the Home Owners’ Loan Corporation and the Reconstruction Finance Corporation to liquidate nonperforming loans in bank portfolios, and to bail out lending institutions that were insolvent.

But the most dramatic intervention came with the passage of the 1934 National Housing Act. It created the Federal Housing Administration, or FHA, to provide insurance against mortgage defaults for lenders. FHA’s program successfully integrated the 30-year, fixed-rate mortgage with low down payments to home buyers.

Later, Congress chartered Fannie Mae as a government-owned agency to become an investor for FHA-insured loans. In reality, Fannie Mae basically acted as a large portfolio manager.

As the economic cycle again shifted from bust to boom following the end of World War II, the housing-finance system stabilized and the private sector again took precedence in investing in mortgages. Interest rates were low, Savings & Loans were again growing, and commercial banks increased their presence in the mortgage market. Meanwhile, demand for government-insured loans dwindled.

The federal government privatized Fannie Mae in 1968 – both to reduce the need for the government to purchase mortgages and to spur private investment in the asset. The newly private firm was allowed to purchase loans not insured by the government – so-called “conventional loans.”

The role of creating a program to securitize mortgage loans was assumed by my agency, the Government National Mortgage Association – more commonly known as Ginnie Mae.

Ginnie Mae is not a GSE – as are Fannie Mae and Freddie Mac. It is a wholly owned government corporation. At the heart of our success, as well as the success of the entire secondary market, is the mortgage-backed security, or MBS which our issuers use to issue bonds on our single security platform that many say is the ultimate level playing field because it treats all issuers the same.

In 1970, it was Ginnie Mae who guaranteed the issuance of the world’s first MBS, which allowed many loans to be pooled and used as collateral in a security that could be sold in the secondary market. With the full faith and credit of the United States behind it, Ginnie Mae guarantees the timely payment of principal and interest to security investors of MBS which are issued on our single security platform and collateralized by loans insured by FHA, VA and the Rural Housing Service.

It was the creation of a standardized MBS that revolutionized mortgage finance in America. It broadened the investor base while separating credit risk from interest-rate risk. Moreover, MBS came of age at an opportune time as economic conditions deteriorated once more in the 1970s.

Over the next two decades, the housing finance system faced twin threats of rising inflation and climbing interest rates – threats set in motion by higher government deficits and oil shocks that sent energy costs soaring.

Higher interest rates severely punished Savings & Loans and Fannie Mae because they relied on short-term deposits to fund their long-term, fixed-rate mortgages. Suddenly, banks were paying higher interest rates to attract deposits than they were earning on their existing portfolio of mortgages. Thousands of Savings and Loans became insolvent and had to close. In 1980, Fannie Mae was losing a million dollars a day from mismatched duration of assets and liabilities.

It was a seminal moment in the history of U.S. housing finance.

If not for the utilization of MBS to raise funds for mortgages from the world’s capital markets, the 30-year, fixed-rate mortgage would have died along with the Savings & Loan industry. But the creation of a standardized MBS and, in particular, MBS guaranteed by Ginnie Mae, enabled the housing industry to recover from the loss of so many bank investors and preserved access to long-term, fixed-rate mortgages. Fannie Mae issued its first MBS 10 years after Ginnie Mae – to sell its mismatched mortgage portfolio into the capital markets.

The creation of the MBS market transformed the U.S. housing finance system.

For instance, since its peak years in the early 1970s, commercial banks and savings institutions now play only a limited role in owning mortgages. Today, more than 60 percent of mortgage debt outstanding in the U.S. is securitized in mortgage-backed bonds.

The key to this successful transition is the so-called TBA market, made possible by the standardized and common MBS, mentioned earlier. The TBA market is so crucial to the entire mortgage finance system in this country, that the fear of disrupting this market has proved a barrier to housing finance reform – because anything that disrupts trading – even for a short time could disrupt the entire marketplace.

Without the TBA market, lenders would not be able to lock in loan applications prior to actually originating loans and borrowers could not lock in interest rates.

To give you an idea of how the TBA market creates liquidity for mortgage-backed securities, consider these numbers:

As of the 3rd quarter of 2013, the total amount of MBS guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac totaled $5.3 trillion. That’s a little less than the $7.7 trillion in corporate bonds and a bit more than the $3.6 trillion of municipal bonds outstanding at the same time.

But the magic of TBA enabled the daily trading volume of MBS to far surpass either of those other securities. Agency MBS averaged $178 billion in daily trading, while corporate bonds were $20 billion and munis just $10 billion. That extraordinary liquidity makes Agency MBS second only to US Treasuries in attractiveness to investors and keeps prices low for home borrowers.

Ginnie Mae’s flexible model and single securitization platform has proven its ability to respond in both up and down markets. This was never so evident than during 2006 through 2012.

Housing prices peaked in early 2006, and then began a steady decline, reaching new lows in 2012. On December 30, 2008, the Case-Shiller home price index reported its largest price drop in its history. The credit crisis resulting from the bursting of the housing bubble is—according to general consensus—the primary cause of the Great Recession – another turning point in the United States housing finance system.

During this time investors in US and around the world sought quality and safety in instruments such as Ginnie Mae securities. The beneficiaries of this flight to quality were American homeowners who experienced the lowest mortgage rates in history.

For the last several years the market has been steadily recovering, and the demand for MBS issued off the Ginnie Mae platform remains solid.

In some ways this is due to the emergence of new entities that occupy the space once dominated by traditional banks. These new entities show no sign of retreating from the marketplace. Traditional banks have continued to exit the mortgage origination and servicing space, due in some part to the proliferation of regulations that emerged after the crisis. Because they are not depository institutions, the new institutions are not subject to banking supervision.

The transition of the market is evidenced in the growth in outstanding Ginnie Mae guaranteed MBS.

It took 40 years for the amount of mortgage-backed securities guaranteed by Ginnie Mae to reach $1 trillion in 2010. Just four years later, the total had grown to $1.5 trillion.

Our ability to attract domestic and global capital is essential to our ability to facilitate affordable housing finance options for those seeking home ownership, affordable rental housing, assisted living, and senior citizens seeking to remain in their homes. We estimate that about 40 percent of investors in Ginnie Mae MBS are offshore.

As we’ve noted here, Ginnie Mae has proven its value in the marketplace. Our model is flexible and generic. It allows the new entrants to flourish in a market that was not working.

However, the growth is not without cost, and that cost is largely in the growing complexity of monitoring the issuers of Ginnie Mae securities. As we noted earlier, one of Ginnie Mae’s primary roles is to make sure that the issuers of Ginnie Mae securities can make their “pass through” payments to investors.

In the past, when a majority of Ginnie Mae MBS were issued by depository institutions such as Wells Fargo, JP Morgan Chase and Bank of America, the job of monitoring our issuers was much easier, and much of it was done by regulators. In the last two years depositories have been replaced by non-depository institutions not overseen by federal prudential regulators such as the Office of the Comptroller of the Currency or the FDIC. Companies such as Quicken, PennyMac and Freedom Mortgage are the new powerhouses in home lending and securitization.

While the addition of these firms has enhanced competition, broadened the availability of credit and reduced concentration risk for Ginnie Mae it also stresses our capacity to monitor and mitigate risk of these new entrants.

As we noted, the new entrants are very different than banks, and the risks they pose are different. While we welcome these new entrants, because we know that they are providing much needed capital which translates into credit availability – we have a larger and more complex job than we once did. Like most federal agencies, Ginnie Mae must ask Congress for appropriated funds to hire full time staff. Limiting our ability to increase staff to cover the new responsibilities I’ve outlined.

Without additional staff, we will need to take steps to significantly mitigate our risk which could include limiting new Issuers or boosting our capital and liquidity standards in order to protect American taxpayers.

However, no matter which steps we choose to mitigate risk, the end result is likely to be constriction of credit for borrowers. In turn, that may have severe ramifications for the U.S. – and the world – since the housing market is such an important engine for our economy. In addition, it would reduce the investment options of global investors who turn to Ginnie Mae-backed securities for safety and yield.

I believe it can all be avoided if Congress just allocates the necessary funds for Ginnie Mae staff needs.

I know that my concerns are shared by industry groups and consumer advocates throughout the U.S. who have joined me in appealing for additional staff resources.

Thank you for the opportunity to speak with you this morning. We share similar goals of creating vibrant and affordable housing markets for our economies and we can learn much from one another from these types of dialogues. Have a great conference and I look forward to visiting with you again.