At FHFA and Ginnie Mae Listening Session Regarding Minimum Financial Eligibility

Requirements for Single-Family MBS Issuers

April 25, 2022

Good afternoon. It is my pleasure to co-host this listening event with my friend and colleague Acting Director Sandra Thompson. The housing finance world has undergone a remarkable evolution since the global financial crisis of 2008, including in the composition of who performs the all-important mortgage lending and servicing functions. Ginnie Mae and FHFA, as well as the Conference of State Bank Supervisors, have invested a great deal of time and effort contemplating these necessary changes within government, and today’s session is another example of this — ensuring key stakeholder concerns are heard and discussed. I really appreciate everyone who has joined today and those who will speak to their concerns and the impacts of policy in this space.

Our current issuer eligibility requirements are a useful tool in promoting successful participation in Ginnie Mae’s mortgage-backed securities (MBS) program. Today, with the knowledge gained through our ongoing monitoring of our issuers, our own liquidity risk mitigation efforts in response to the pandemic, and other modeling and analysis, we have determined that Ginnie Mae’s issuer eligibility requirements must be enhanced, not only to protect the program and create resiliency during adverse market conditions, but also, to ensure the stability of the Ginnie Mae MBS marketplace for generations to come.

As the team undertook this initiative, several core principles were embraced: 

• First, enhance the level of confidence so that issuers are positioned to be successful through multiple economic cycles. Ginnie Mae wants issuers to succeed through volatile cycles because they are integral to the housing capital markets and provide consistent and essential access to credit for homeowners and renters — the beneficiaries of our insuring and guarantying agencies’ programs. This is particularly important given the increased dependence of today’s industry on external financing. 
• ​Second, ensuring that the enhanced requirements’ immediate impact on the existing issuer base is manageable. Just as it would be wrong to ignore the need for change, so it would be wrong to introduce destabilizing change. 
• Third, to the greatest extent possible, harmonize with the requirements proposed by FHFA. Such alignment simplifies issuers’ capital and liquidity planning as well as makes compliance easier to measure, report, and govern. We must also acknowledge, however, that the risks inherent to the government mortgage sector are quite different and that cannot be ignored, meaning it is possible that we may, in some places, diverge from selected tenets ultimately implemented for the enterprises.

We believe we have achieved these three key objectives. Our proposed new eligibility requirements that will ultimately be released will achieve three other important goals: 

1. ​​Assess the total risk profile of an issuer, rather than only looking at the risk related to Ginnie Mae MBS exposure; 
2. Account for capital and liquidity impacted by interest rate risk and origination activities; and 
3. Differentiate the relative risk issuers take, such as leverage and interest rate and credit sensitive assets like MSRs and Non-QM.

This is naturally a subject of which issuers will have strong opinions, and we appreciate their input. Some brief comments on the risk-based capital portion of our proposed requirements: 

• As many pointed out, there are fundamental differences between the business model of a bank and a non-bank, as liquidity is the primary risk for the latter. That doesn’t change the fact that the protection afforded by different asset classes can vary considerably, and we continue to believe that this difference should be recognized in our eligibility standards and risk management. Further, as some have pointed out, stronger capital standards are generally a credit positive for institutions, which is favorable for bank-supplied lending and ultimately, we believe, for MSR value. 
• There have been concerns that these requirements would negatively affect smaller issuers or impede lending to low- to moderate-income or minority borrowers. In fact, our analysis shows that smaller issuers, on the whole, are closer to full compliance with our proposed requirements. And nothing about the requirements is punitive for loans to the borrowers that are the subject of this expressed concern. 
• There is a view that the government’s focus should be on broad emergency liquidity facilities rather than on enhanced financial standards at the individual institution level. Whether that makes sense is indeed an important and interesting public policy question, but it is not a viable rationale for otherwise maintaining the same standards when the institutional risk profile of the industry has changed dramatically while the Ginnie Mae guaranty fee has remained exactly the same through these changes. We will continue to evaluate the merits of such a facility alongside our counterpart agencies.

Nevertheless, there are some areas where the feedback on our proposal was compelling and will have an influence as we work to adjust our proposal. We deeply appreciate all those who took the time to provide thoughtful submissions in response to the Ginnie Mae request for input last year and we have taken time to carefully review and fully analyze various scenarios as well as the larger context in which we are working alongside FHFA. This effort has taken time, but it was really important, and Secretary Fudge and I want to be sure all the considerations and priorities are appropriately considered and that our fundamental commitment to the Administration’s goal of ensuring equity in our housing finance system is reflected in our policy.

Through our ongoing dialogue with industry stakeholders, including our work with FHFA, I am confident that Ginnie Mae will arrive at final enhancements that encourage issuers to engage in higher levels of capital and liquidity planning and governance and consider all lines of an issuer’s business model, contemplating both origination and servicing activities and risks. As we work towards finalizing our eligibility requirements, we will continue to study event-driven risks and refine our issuer stress testing analytical framework.

My remarks this afternoon would be incomplete without placing emphasis on the critical mission of Ginnie Mae. Since its inception in 1968, Ginnie Mae has made affordable housing a reality for millions of Americans by ensuring liquidity and stability to the government insured programs that serve some of the most underserved populations in our country as well as critical segments of consumers including seniors, veterans, and tribes — and doing so while protecting taxpayers. Ginnie Mae is the only federal agency tasked with the administration and oversight of an explicit full-faith and credit guaranty on MBS. For our insuring and guarantying agency partners — including FHA, the VA, USDA’s Rural Housing Service and HUD’s Public and Indian Housing — we are the only game in town.

Our legacy is that, even in difficult times, an investment in Ginnie Mae MBS has proven to be one of the safest an investor can make, as evidenced by the global investor demand for these securities. Our stewardship of this legacy, and responsibility to all our stakeholders, is always at the forefront of our decisioning and risk management approach and has been front and center for me since I became President of Ginnie Mae in December.

With that in mind, I am grateful for this opportunity to listen to feedback from our stakeholders and to work closely with our sister agency, FHFA, to advance this important work.

Thank you.