Statement by Michael R. Bright
Nominee for President, Government National Mortgage Association
Before the Committee on Banking, Housing, and Urban Affairs
United States Senate
July 24, 2018
Chairman Crapo, Ranking Member Brown, and distinguished members of this committee, thank you for inviting me here today. It is an honor to appear before you as the nominee to be the President of the Government National Mortgage Association, or Ginnie Mae.
Let me take a moment to quickly thank my family who is here. I’m joined by my wife, Maggie, and my son, Mac. My daughter Margaux, who is 5, is at her grandparent’s house in Florida, probably watching on the computer. All 3 of them have been incredibly supportive of me since coming to Washington, and that comes despite the many nights of coming home tired, grumpy, and distracted with work. I know that I ask a lot of them, and I am always thankful for their love and support.
In addition to being a father, for the past twelve months it has been my honor to serve as the Executive Vice President and Chief Operating Officer of Ginnie Mae. I’d like to tell you a little about what I have learned, and what I think still needs to be done.
Ginnie Mae was created in 1968 when Congress spun off Fannie Mae as a government-sponsored private company and retained Ginnie as a complimentary government corporation given the task of facilitating the securitization of certain mortgages with an explicit, transparent, and paid for government guarantee. Ginnie Mae has since evolved into a $2 trillion government security with a focus on facilitating lending to low and moderate income, rural, urban, and veteran borrowers.
Today, Ginnie Mae’s bond and Ginnie Mae’s brand are globally recognized as the most pristine mortgage security in the world. This is because of Ginnie Mae’s track record of success and our robust process for ensuring the timely payment of principal and interest to security holders. Ginnie Mae has never missed a payment in its 50 years of existence, even during the financial crisis. That is exactly what an explicit government guarantee is meant to provide and delivering on that mission is what we do every single day.
The day job of managing the roughly 150 employees of Ginnie Mae has been an incredibly rewarding experience for me over the past year. Ginnie has some of the most dedicated, knowledgeable, and mission-focused professionals I have ever worked with. They are squarely focused on the challenges of dealing with both Ginnie’s growth and the evolving nature of the U.S. mortgage market.
To address these challenges, over the past twelve months we have launched a modernization campaign called “Ginnie Mae 2020,” a three-year strategic plan that will have our data centers running on cutting edge technology, realign our counterparty risk management framework, help bring in additional financing for mortgage servicing rights, and expand our global investor base through outreach and education in dozens of countries around the globe. All these efforts are well under way, some are even nearing completion, and we are very excited about the promise they hold for the future of our organization.
One issue I have worked with many of you on this past year is that of so-called “VA loan churning,” or the rapid refinancing of VA loans with little or no benefit to the borrower, as well as the making of VA loans at interest rates higher than a veteran should be getting. I want to specifically thank Senators Tillis and Warren for their leadership on this issue. Between the work we have done administratively at Ginnie as well as the language recently passed into law, we have taken a major step towards rooting out behavior that was threatening the very viability of the Ginnie security, and thereby threatening the viability of the VA, USDA, and FHA programs we support. We will not tolerate this behavior, and we now know that Congress stands with us. Collectively, our efforts are working. We can already see that in the form of a better security price, which directly translates into lower rates for FHA, VA, and USDA borrowers.
I didn’t begin my career in Washington. I came here after working in my twenties on mortgage trading desks in Los Angeles and Charlotte, including through the financial crisis. During that time, I learned thousands of lessons that I place into two thematic buckets: First, I learned that the mortgage market is incredibly technical and enormously complex. I feel honored to be able to use the technical knowledge I gained to serve a broader public policy mission that benefits all Americans. Second, I learned that greed and unbridled ambition can be dangerous realities, and if left unchecked in the housing market, the consequences can be disastrous. I came to Washington in large part to help ensure we never repeat the 2008 financial crisis, and I wake up every day with that mindset still.
I also want to say thank you to the members and staff that I have been privileged to work with in the past, most especially Senator Corker. Working with Senator Corker, Senator Warner, Senator Crapo, and other members of this committee as a staffer was a tremendous honor and an experience I still think about every single day.
Going forward, my main goals for Ginnie Mae are to ensure that the agency is well run, and that the agency can continue to serve its statutory obligations to help ensure a stable U.S. housing market. There is much to be done, and I look forward to the task.
Ginnie Mae Summit
September 21, 2015
Welcome to Ginnie Mae’s 2015 Summit!
It’s great to see so many people here at our third Summit. This event has grown each year -- both in importance to the industry and in the number of attendees. This year we have about 700 people – our largest crowd ever.
And it’s truly international group. We have representatives here this morning from the British Embassy as well as the Chinese and Japanese governments. To them I say: o’hayou and nǐhǎo. So thank you for being here. Thank you for being our partner.
We have a great program in store for you – from workshops covering everything going on at Ginnie Mae – to the big issues facing our industry. We look forward to your feedback. Everyone here today, particularly if you are a Ginnie Mae Issuer -- has been a part of the biggest transformation in the history of mortgage finance.
The theme of the conference this year is “game changers.”
Ginnie Mae was actually created based on the idea that the environment would stay static — that the game would NOT change.
Our infrastructure, including our small staff, was based on the premise that the MBS program would never change. All we really needed to do was keep the assembly line running. But TODAY, almost nothing we do would work on an assembly line.
You have probably heard me talk about the massive shift in our issuer base --to independent mortgage bankers. New business models for managing mortgage servicing rights. Layer upon layer of confusing and conflicting regulations. And a more prominent FHA and VA.
These things and more have changed the game for all of us.
We work every day because we know that having a home is the ultimate game changer in the lives of the American people.
So again, thank you for being our partner.
This morning I want to look ahead, and talk about how we are meeting the challenges I just referenced.
But first, let’s take a minute to look back -- at what we have accomplished together in the past five years.
- In fiscal year 2015 alone, there are over 4.9 million families, most of modest financial means, that have directly benefitted from a Ginnie Mae guaranteed securitization. That’s because of you!
- Experienced NO interruption in getting a mortgage. And that’s because of you!
- Ginnie Mae took a chance when we embraced and supported independent mortgage bankers in our program. This decision turned out to be the right one – certainly in keeping credit access flowing. In the last 4 years, over 5.4 million borrowers have benefitted because Ginnie Mae welcomed independent mortgage bankers. If we had acted differently, either these people would have had to pay more for their mortgage or they would have been locked out of the market completely. Because of you, these families have an affordable mortgage and a place to call home!
- Also during the last four years, Ginnie Mae issuers pumped an additional $602 billion into U.S. housing - - while Fannie Mae and Freddie Mac’s presence was minimal at best. That’s because of you!
- And, if you look at the monthly volumes reported from the GSE’s and Ginnie Mae in the last two months ... you’ll see we have surged to the top of the industry. And that’s because of you – and you – and you!
These are impressive achievements. Together we made a difference!
So, things are going well. Mark Zandi will tell you later today that we are in the “SWEET SPOT” What could possibly go wrong? Well, now it is the time in my speech when I introduce the word “BUT.” Are you ready?
Yes, we’ve had great success - - BUT if Ginnie Mae’s resource challenges are not addressed, we have to slow down that assembly line.
Here’s why. Five years ago, Ginnie Mae was like the little engine that could, churning along with a business model designed for issuers that were mostly large or regional banks. They had strong and simple balance sheets, financial structures that were relatively simple, yet even in that environment, Ginnie Mae could barely keep up with just 60 employees. Our engine was huffing and puffing and it was definitely struggling.
Many of you know what has happened since then. Our issuer base has doubled. Today almost two thirds of Ginnie Mae guaranteed securities are issued by independent mortgage banks. And independent mortgage bankers are using some of the most sophisticated financial engineering that this industry has ever seen.
We are also seeing greater dependence on credit lines, securitization involving multiple players, and more frequent trading of servicing rights -- all these things have created a new and challenging environment for Ginnie Mae.
Frankly, as we look forward to the future, I do not believe that we have a large enough engine to deal with the steep hill in front of us.
In other words, the risk is a lot higher and business models of our issuers are a lot more complex. Add in sharply higher annual volumes, and these risks are amplified many times over.
To confront this level of enhanced risk, we simply must become a different organization. Right now, we are doing the best we can with what we have – but the challenges keep growing.
Our budget, which stands at $23 million for salaries and expenses, simply does not allow us to make the changes needed to keep pace with the transformation that has occurred in the industry. We are managing a $1.6 trillion portfolio of outstanding guarantees. On a monthly basis, we are doing more business than either Fannie Mae or Freddie Mac.
Yet we are operating with infrastructure and platforms that sometimes remind me of the military’s use of pontoon bridges – temporary structures that are cobbled together to deal with unexpected obstacles or challenges.
Also, we have depended on sheer luck. Luck that the economy does not fall into recession and increase mortgage delinquencies. Luck that our independent mortgage bankers remain able to access their lines of credit. And luck that nothing critical falls through the cracks.
If you think about the impact that Ginnie Mae has -- in the mortgage finance industry, and on the economy at large, it is too important to leave any part of it to luck. Instead, we need to face up to the challenges presented by the new environment.
Fortunately, we’ve got a plan to do just that.
- One that builds out a process to monitor issuers, with sophisticated financial oversight capacities similar to those of the FDIC.
- One that will give us the needed resources to recruit and retain talented staff.
- One that will create a new operating infrastructure and platforms that replace all of those pontoon bridges, with permanent steel reinforcements – strong enough to manage over 430 issuers no matter how complex their business model.
- One that creates a risk-management system that supports millions of families who depend on government mortgages. Our vision for the future represents a new standard for Ginnie Mae and for housing finance in America.
A security that preserves our guarantee, which makes the 30-year mortgage possible, BUT puts the government in the most remote position of risk. A common security that creates what some have called the ultimate level playing field. And one that attracts broad and diverse mortgage investors, both here and abroad. An operating securitization platform that is flexible and durable enough to handle fluctuations in the mortgage market, but provides standard data to investors that they can trust. And a business model where private capital gets the most reward, but also bears most of the risk.
That’s our vision for the future -- a future we will have together. It can create game changers in the lives of the people we serve.
However, whether we have the resources to implement this vision is not entirely up to us. The reality is that we depend on Congress to support the increased funding required to implement this vision.
Currently, our budget request of just $5 million additional dollars, has been denied by Congress. This is in spite of the fact that we don’t use a dime of taxpayer money. In fact, last year we made $1.5 billion in profit, and on average have generated an annual profit of more than $900 million for the U.S. Treasury over the past five years.
We realize that the industry is currently grappling with an uncertain regulatory environment that is challenging to say the least. We don’t want to create additional obstacles, but Ginnie Mae has to do SOMETHING.
So in the coming weeks and months we will make announcements about the steps that we will be taking until our staffing situation improves. But even so, I am still focused on a favorable outcome. Together I believe we can continue to make a difference.
The alternative would be to remove the opportunity for affordable mortgage finance from millions of people because Ginnie Mae has to back away from the market.
For almost 50 years, Ginnie Mae has served the mortgage markets well. We have introduced historic innovations, such as the mortgage-backed security. We have weathered many a storm as business cycles come and go, including the Great Recession, perhaps the biggest threat to the mortgage finance industry since the Great Depression. Together we made sure that, even during the worst times, qualified borrowers could still get a mortgage.
In fact, I sometimes wonder if the interruption was so minor that it obscured the challenges that I have talked about today - -We might have made it look too easy.
Through it all Ginnie Mae has persevered. And what has remained steady through all of this change and upheaval is that we’ve always met our two primary responsibilities:
1) maintaining our common securitization platform; and,
2) protecting the government guarantee.
Today, I believe we are at a crossroads in the history of housing finance in America.
The decisions made by Congress, policy makers and many of us in this room will have consequences for millions of people – homeowners, renters, and people in assisted living. For veterans who depend upon what we do in order to access a benefit that they have earned by defending our country. Because ultimately we are deciding whether our programs will serve the many – or just a select few.
To me, making sure that people have access to affordable mortgage credit, well, that is the ultimate game changer.
Thank you again for coming, and I hope that you enjoy the rest of the Summit.
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.
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.
Remarks by President Tozer
November 3, 2014
PRESIDENT TOZER: Vice Minister Kim, thank you for the kind introduction. It is an honor to be here again at the International Forum on Housing Finance.
On behalf of the United States’ Secretary of Housing and Urban Development, Julián Castro and Ginnie Mae, I congratulate the Ministry of Land, Infrastructure and Transport for organizing this important event. It is great that so many leaders in international housing finance are here today. I also want to congratulate the participants here at this conference.
When it comes to housing and urban development, our nations share common interests. We seek—as President Franklin Delano Roosevelt declared in 1941— “Freedom from Want,” the right to an adequate standard of living that secures prosperity for our people.
We come here looking for the same thing – the economic security that is at the core of today’s working group on housing finance. I commend you for making affordable housing finance a key principle in your work
Today, housing finance is a crucially important topic across the globe. The impact that urbanization has on sustainable housing is important in both domestic and international contexts.
In the case of the United States, more than 80% of U.S. households live in urban areas. More than 90% of U.S. population growth occurred in cities and metropolitan areas in the last decade. This trend is not unique to the United States; it is global.
The world recently passed a momentous milestone in which the majority of the world’s population now lives in urban areas. This unprecedented urban growth has profound implications for virtually every aspect of sustainable development. A full 60% percent of the land area expected to be urban by 2030, has yet to be built.
Let me repeat this, three-fifths of our cities have yet to be created.
Such a staggering statistic has serious policy implications. This means that the choices we make will determine whether our future communities are successful. Our actions over the next 10-15 years will determine the extent to which cities become drivers of innovation and economic growth. Our decisions will also affect social inclusion and environmental resiliency.
Mistakes we make today can have the unintended effect of deepening inequalities, stunting growth and exacerbating environmental risks.
At Ginnie Mae, we are convinced that our success requires us to adopt a cross-disciplinary approach to urbanization and housing finance that breaks down the traditional government policy siloes. This conference is one example of such an effort to examine and exchange best practices for a brighter future. Congratulations to you for bringing us all together.
As we have heard throughout this conference, our cities have significant economic and social importance, yet our communities face enormous challenges. Challenges related to affordable housing and infrastructure require innovation in public finance and private investment. As communities across the world continue to urbanize, a critical question will be how do we finance these investments in our communities?
We are helping find answers to this question today. We are discussing two issues of incredible importance, not only to Ginnie Mae, but to the global housing finance community at-large. The topics of: Financing Sustainable Housing and Housing Finance for Equal Opportunity are two principals deeply embedded in Ginnie Mae’s work.
Ginnie Mae is a wholly government owned corporation. Through the liquidity we provide to the mortgage finance market, and the capital that flows to lenders, we are helping make sure that financing for affordable housing is available to millions of low- and moderate income households across the United States. And we accomplish this with a sustainable business model that provides equal opportunity regardless of income or location—urban or rural.
Ginnie Mae facilitates housing finance in the single-family “ownership” space, and we also finance affordable rental housing, assisted living, healthcare and home equity conversion mortgages for senior citizens.
Ginnie Mae’s primary mission is to channel global capital into the national housing market. Our guarantee is at the heart of our business model.
We guarantee the timely payment of principal and interest on Mortgage-Backed Securities or MBS. We provide guarantees to the securities of federally insured or guaranteed loans that allow mortgage lenders to obtain a better price for their mortgage loans in the secondary mortgage market.
Let me explain how the Ginnie Mae business model works.
We do not buy or sell mortgages. Ginnie Mae Mortgage-Backed Securities, or MBS, are issued by financial institutions. These issuers pay Ginnie Mae a guaranty fee. The Ginnie Mae guaranty allows issuers/lenders to obtain funding at comparable interest rates paid for other sovereign bonds.
Our risk model stands behind three layers of protection: homeowner equity; insurance provided by the government agency that insured the loans; and corporate resources of the entity that issued the security.
The success of Ginnie Mae’s model is based on a balance of three things: the relationship of the private market with the U.S. government; delivering top securitization capabilities, and the explicit guarantee of the government that attracts global capital to America’s housing finance system.
It took an important understanding and recognition of historical developments in the U.S. housing finance market for Ginnie Mae to evolve. This success reflects the economic changes and the historical relationship between the government and the housing market. In the United States.
Ginnie Mae’s origins trace back to the Great Depression of the 1930’s, when historically high unemployment rates led to an unprecedented wave of loan defaults. The resulting surge in home foreclosures further depressed housing values and the nation’s overall economy. Congress passed the National Housing Act of 1934, a key component of the New Deal. The Act created the Federal Housing Administration (FHA) to help resuscitate the U.S. housing market and protect lenders from mortgage default.
FHA was a national mortgage loan insurance program. It encouraged banks, building and loan associations, and other institutions, to make loans because of the insurance against losses provided by the government.
In 1968, Congress created Ginnie Mae to focus on providing a guaranty backed by the full faith and credit of the United States for the timely payment of principal and interest on Mortgage Backed Securities, or MBS, secured by pools of government home loans. These loans are insured or guaranteed by the FHA, the Department of Veterans Affairs’ (VA), and the Department of Agriculture’s Rural Development program.
The VA’s home loan guaranty program was originally developed to assist veteran’s returning home in the mid-1940’s. The primary objective is to provide housing finance to veterans in areas where private financing is not generally available. As a result, this innovative program has helped veterans and their families purchase their first house with no down payment—delivering housing for tens of millions of servicemembers and their families. Because of this program, the VA has helped veterans establish credit as the basis of borrowing to acquire a home and establish a business.
Tracing its origins to the Great Depression, the Rural Development or RD program has also helped extend housing loans to low-income families and senior citizens in rural parts of the United States. RD has provided loans for single-family homes, apartments, and community facilities. Their work has provided affordable sustainable housing in rural areas: thereby making rural America a better place to live for Native American tribes, farm laborers, the elderly and low-income families.
Today, Ginnie Mae remains the primary financing mechanism for all government-insured or government-guaranteed mortgage loans, including FHA, VA and Rural Development.
In 1970, Ginnie Mae developed and issued the very 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 a guaranty for the timely receipt of principal and interest, MBS can be attractive investments for investors worldwide.
MBS supports housing finance by channeling investment capital from markets all over the globe for use in lending to support neighborhoods across the nation. Ginnie Mae’s role from the beginning has been to provide access to capital for affordable housing. Throughout its existence and particularly during the Great Recession, Ginnie Mae has been profitable, and the value of its MBS has been recognized by investors.
It has weathered all storms without any appropriation from general tax revenue or assistance from the U.S. Treasury. In fact, Ginnie Mae has a surplus every year since the issuance of its first MBS in 1970. Ginnie Mae continues to fulfill its mission of attracting global capital into America’s housing finance markets. Since 1970, it has poured approximately $5 trillion of liquidity into mortgage finance markets, helping to fund millions of units of housing.
It took Ginnie Mae about 40 years, from its inaugural MBS issued in 1970 until 2010 to reach the $1 trillion mark in guarantees outstanding, and then only four additional years to reach the $1.5 trillion mark.
Through forums like this, we value the exchange of information on housing finance and housing markets as we seek enhanced understanding of mortgage markets throughout the world.
As we have seen at this conference, sustainable housing finance is not only cherished in the U.S. and Korea but throughout the Asia-Pacific region.
In closing, we can learn much from success and much more from our failures. Ginnie Mae’s success comes from a successful government guaranty and public/private partnerships. The guaranty provides liquidity to channel global capital into the nation’s housing markets to promote affordable housing.
Today, the guaranty enables more homeowners to access affordable housing finance: providing safety and liquidity to the U.S. housing sector.
Again, I congratulate the conference for its formal recognition of the importance of housing finance and providing access to financing for low- to moderate-income households.
We are pleased to be part of this forum. I am confident that this conference will lead us to a more innovative and secure finance system for our housing markets.
I thank the Ministry for hosting this platform for a productive exchange of policy information. By doing this, we are taking an important step to enable more people —around the world—to access affordable housing finance. Thank you.
Remarks by Michael Drayne, Senior Vice President, Office of Issuer & Portfolio Management, Ginnie Mae
2013 Mortgage Bankers Association Secondary Market Conference & Expo
"RMBS Servicing and the Housing Recovery"
Tuesday, May 07, 2013
New York, NY
Servicing underlies our mission of bringing capital from all over the world into the housing finance system in this country. The total of the outstanding single-family Ginnie Mae mortgage-backed securities right now is about $1.4 trillion. That means there is about $1.4 trillion in servicing rights supporting that outstanding MBS. We need to have a universe of mortgage servicers that are up to the task and able to fulfill their responsibilities under our program.
The way see servicing at the moment is very much focused on a significant and interesting transformation taking place in the market right now. To put it in context and give some numbers, we think that about a third of the $1.4 trillion in the Ginnie Mae portfolio—the ownership of those servicing rights— will be changing hands over a three-year period, starting in mid-2011 to the middle of next year. That’s a huge change for the Ginnie Mae program. That’s an enormous amount of servicing rights to change ownership. It’s not simply that the ownership is changing, but the new owners of the servicing rights are largely institutions that are new to Ginnie Mae, or new to servicing, or new to the industry as a whole. Managing that change is something that is consuming a lot of our thinking and a lot of our resources right now.
There are a lot of interesting aspects to that. We’re, of course, concerned with basic questions, such as: Do these entities have the competence? Do they have the financial resources to fulfill their function in the Ginnie Mae program? We’re certainly aware that by and large the new owners of servicing rights are non-depositories, whereas, the great bulk of Ginnie Mae servicing had been held by depositories for a long time. A lot of these newer entities have a background in more specialized parts of servicing—or their staff does—and they portray themselves as being more able in areas such as default servicing than some of the megabank servicers have been. That’s another aspect — servicing is sorting itself out in ways that permit a more specialized focus.
There are two key objectives that we have in managing this transformation and the Ginnie Mae program as a whole. One of them is, very simply, we just don’t want failures. Our role is to guarantee that the mortgage-backed security holders will be paid no matter what. We want to make sure that servicers that are overseeing the administration of the pools will be able to make these payments. In some ways, we at Ginnie Mae live in a very simple world, and everything we do revolves around making sure we are taking all the steps and performing the due diligence and monitoring that we can to make sure there aren’t failures.
The second thing we care a lot about is related to that. We want there to be a liquid market for our servicing rights. We have a number of reasons for caring very passionately about that. One is that we want to continue to attract hundreds of billions of dollars into the housing finance system. As I described, what makes that possible is to have servicers that are willing to hold those servicing rights. If there’s a liquid market, and servicers know that if their circumstances change there will be someone else willing to hold those servicing rights, that will make people more willing to participate in the market.
The other, more parochial, reason we care a lot about the liquidity of the market is that if there is a failure, if there is an Issuer of ours that is not able to fulfill its obligations, we would rather there be somebody else that is willing and able to take on those responsibilities immediately, rather than have Ginnie Mae take them on. It’s a strategic initiative of ours to develop other avenues for dealing with default situations than what Ginnie has historically done — take possession of the servicing rights. We did that with the TBW default in 2009. It’s an enormous, time-consuming exercise that doesn’t play to our core strengths. We just prefer someone else do that. To the extent there’s a liquid market for Ginnie Mae servicing rights, that helps us. In the next couple of years, you’re going to see us devote ourselves to doing whatever we can to identify other parties that could take on servicing rights in distress situations and make it easy for them to do it.
That’s really what we’re about. A lot of the more specialized issues that I think the panel will talk about this afternoon are of interest to us, but we really look at them through that narrow lens. For example, the question of servicing compensation — there are lots of interesting viewpoints one could have. It’s a complicated issue in a lot of ways. The main thing Ginnie Mae cares about though is that we want servicers to be compensated at a fair level for what they do. If servicers feel like the compensation is too thin, they’re going to be a lot less likely to take on a Ginnie Mae portfolio at a time when we want there to be a liquid market and we want them to take on a Ginnie Mae portfolio. That’s an example of how, in these areas having to do with policy that governs mortgage servicing, our viewpoint is tied to the health of the Ginnie Mae program.
I think Ginnie Mae is unusual in that, while we are completely a governmental entity (we are administered through the Department of Housing and Urban Development), we are an independent government-owned corporation, and we have a commercial focus. For the health of the Ginnie program, we really need servicing in this country to be a profitable endeavor that people want to take part in. If servicers have a hard time making a reasonable amount of money for the services they provide, it’s not good for us because we have this gigantic portfolio that’s growing and will need to be serviced. We need to pay attention to the market and the liquidity of the market and try to inform the policy debate in order to make sure we are going to have a servicing industry that can stand us and homeowners in good stead for a long time to come.
Moderator: How do you see this new regulatory burden affecting the industry?
Drayne: A lot of the new applicants we see in the Ginnie Mae program who want to become servicers are fairly small shops choosing to come in by using a sub-servicer, which is fine in theory and fine with Ginnie Mae. But it means there are a lot of people trying to play this game who weren’t trying to play this game before, and they’re essentially outsourcing the need to invest in regulatory compliance or systems to a pretty small number of other entities. And that’s not necessarily a bad trend in and of itself, but it’s something we’re watching closely. I think the whole industry should watch closely. Is this going to work with lots of people trying to do things they haven’t done, relying on third party entities to handle the new complexities in this line of work?
Moderator: Can you talk a little about the criteria you use in evaluating counterparties?
Drayne: The Ginnie Mae model is different than Fannie’s and Freddie’s. We have fewer areas we’re concerned about. We don’t have credit risks — unlike Fannie and Freddie. That is the province of FHA, VA and Rural Housing. What we’re looking at is very simple: Do servicers have the wherewithal to collect money and remit money and report on all of those activities? What we’re looking at is largely a function of financial stability, because particularly with these government programs, the amount of time servicers will be responsible for advancing funds is a lot longer than it is in the conventional world. Financial stability and resources are a big part of it, as is just basic competency in managing the flow of money and managing the custodial accounts. That’s what we’re looking at. I will say that Ginnie Mae has more resources than it’s had in the past, and we’re starting to expand the areas that we look at and do some better types of reporting to Issuers about how we think they’re performing. We’re looking more at things like Issuers who have outlying performance when it comes to prepayment speeds and the impact that might have on the program. So we’re doing more, but it all comes down to the basics I’ve described.
Moderator: One last question. What are the key lessons learned from the crisis—macro lessons, and looking forward, what are some of the key challenges facing us as we try to build a new servicing paradigm?
Drayne: I’ll go small with my answer—just a micro concept. We were having a meeting this morning with one of our largest Issuers. We were going over a bunch of operational issues — six or seven of them — that are of concern to Ginnie Mae and this Issuer. We thought we were talking about six or seven different issues, but at the end of the conversation, we realized it was all the same issue. Everything we were talking about had to do with the prevalence, unforeseen a few years ago, of going back into loans and making some modification or change to a loan after the loan originally closed, and all of the operational problems that result from that. Obviously, nobody ever thought of this or anticipated that there would be so much of this going on. To me, it’s an open question: Is this something that arose because of particular circumstances that lasted a few bad years, and we’ll just go back to normal, or is there something fundamentally different about servicing a mortgage loan? When you think the loan is closed, now are you really just starting a chapter where there could be lots of different things happening? I don’t have an opinion about that, but it’s been such a big, unforeseen development that I think it’s an interesting thing to wonder about.
Remarks by Ted Tozer, President, Ginnie Mae
2013 Mortgage Bankers Association Secondary Market Conference & Expo
"Secondary Market Executives Update"
Monday, May 06, 2013
New York, NY
I want to get through a couple of systems changes that are going on at Ginnie Mae; things we’ve done this past year. Then I’ll touch on a couple of other initiatives so I can stay within the 10-minute rule Garry [Cipponeri] gave us.
As Garry said, we should be close to breaking $1.4 trillion in outstanding securities with our April issuance. Year to date — our year starts October 1— we have issued $272 billion worth of securities, compared to $260 billion in the same period last year. We did $388 billion in issuance in 2012. So we will probably break the $400 billion mark this year, based on current projections.
Right now, with our partners at FHA, VA, and Rural Housing, we are accounting for about half of the purchase activity that’s going on in the country right now.
People do wonder about us approving Issuers, and we do approve them. Over the last two and a half years, we’ve approved more than 105 new Issuers. To give you some more statistics, right now, our approved Issuer base stands at about 420 Issuers; we increase our base of Issuers every month.
As far as our securitization platform, currently we have just under nine million loans in our securities, and we have 3,000 pools we report on every month. We release 34 million pieces of data on our pools every month. There’s a lot of data that runs through our program.
To talk about the initiatives we have, regarding the amount of data we put out, we’re trying to modernize our securitization platform and systems. We’re progressing in that process. We are moving off our old mainframe to a server-type environment. And you’re going to see changes in the way you do business with us that should be positive as we start rolling out different types of features in six to nine months. Again, you’ll be hearing from us; we’re engaging a lot of the Issuer base to make sure we’re hitting its needs with the new platform.
We’re in a situation, too, where we’re moving to the new MISMO standards with our data, we are working with the industry on that going forward.
Another issue we’re dealing with now is the concept of the FHA and VA market share being pulled back. I hear about it all the time from policymakers. With overall bond volumes eventually coming down, we’re looking at the possibility of merging our Ginnie Mae I and Ginnie Mae II programs into one program. We are meeting with a group of Issuers as well as investors to understand the complexities of that process because we feel it’s important we have their input. Bifurcating the volume into two securities in today’s world doesn’t make a whole lot of sense, so we’re looking at how to merge the two with minimal disruption to the marketplace. You’ll be hearing more and more of that as we start our outreach in the next few months to understand the potential pitfalls in moving forward. This merger will be a huge initiative for us; Ginnie Mae I is the original security, it was first issued in the 1970s. This is a nearly 50-year-old program that we’ve been looking to potentially merge into the Ginnie Mae II program.
The last thing I want to touch base on is that we really are concerned about liquidity in the market and making sure that Ginnie Mae is servicing trades as well as possible. Because of that, we have rolled out our acknowledgment agreement that we’ve been talking about for a couple of years. We’re getting some pretty good traction on that as far as people using it as a way to finance their MSRs and to raise cash. But we’re also trying to make the document as flexible as possible. We’re trying to bring liquidity to the Ginnie Mae market and give support to you as Issuers.
Those are the issues we are looking at right now. Again, you’ll hear a lot about the Ginnie I and II merger as we start rolling it out.
Moderator: So you’re eliminating the Ginnie Mae I, but aren’t you going to start a third program in essence because you’ll have customs that are eligible for TBA and customs that are not eligible?
Tozer: Not really. We’re in a situation where you just have the customs that are out there, conventions that were done for low amounts, that would basically be eligible for TBA, they wouldn’t really be a third program. The third security is more of a concept that you would have Fannie [Mae] and Freddie [Mac] doing. The baseline for TBA eligibility would be the multi-lender pool, but you could also have a limited number of custom pools that would also be TBA eligible. We’re looking at all the options, weighing the pros and cons, and over the next few months, we’re going to be talking to all the stakeholders.
Moderator: The question is around raising “G” fees. We’ve seen “G” fees raised as well as MIPs for FHA.
Tozer: Our “G” fee is not going to go up. As far as MIPs for FHA — that might be something they’re looking at — not so much in terms of selection but more in terms of balancing the business with the GSEs to make sure their footprint makes sense. I think FHA is very comfortable with their current MIP level. It’s more than adequate to cover their credit exposure, so now it’s more of a policy issue. I don’t think there are plans for FHA to do anything as far as its premiums. Again, they’re comfortable with the book of business they’re getting as far as the below-680 FICO score. They think that the premiums are adequate to cover the profile for that borrower.
Remarks by Michael Drayne, Senior Vice President, Office of Issuer & Portfolio Management, Ginnie Mae
NRMLA Eastern Regional Meeting & Finance and Investment Forum
Wednesday, March 20, 2013
New York, New York
I want to thank NRMLA for again providing me with the opportunity to speak to this gathering. We at Ginnie Mae are very conscious of both the uniqueness and special role of the HECM program, and the importance of the Ginnie Mae mortgage-backed securities program to its operation and success. We value the partnerships we have forged with the lending and investing communities, and occasions such as this are useful in fostering a continued strong relationship, for the ultimate benefit of America’s senior homeowners.
The purpose of my remarks here today is to provide an update on our major activities and views regarding the HMBS program. But I’ll preface this topic with a statement I make just about anytime I speak on behalf of Ginnie Mae: Understanding how Ginnie Mae views anything depends simply on understanding what Ginnie Mae is. This is a frequently misunderstood subject, and we make it a point to be vigilant about explaining our model, and correcting the idea that we are more analogous to Fannie Mae and Freddie Mac than is in fact true, as well as addressing confusion about how we relate to or interact with FHA.
Ginnie Mae can be described as simply a mono-line insurance company owned by the federal government. We insure mortgage-backed security holders against loss, by guaranteeing that they will be paid according to the terms outlined in the prospectus. We don’t buy loans, or issue securities, or set rules for originating or servicing loans – the latter being the province of FHA. Our primary concern is that the money for the security holders moves from one place to another, at the time and in the amount specified.
Today, we have about $1.4 trillion of this insurance in force, in the form of outstanding MBS balances, or – seen from the other side -- Ginnie Mae mortgage servicing rights. This is about a 10% increase over last year. The HMBS portion of this figure today stands at about $40 billion, about 3% of the total – but a 25% increase over last year.
I’ll mention one other set of figures that I think is particularly interesting. A distinguishing feature of the Ginnie Mae HMBS program is the ability to securitize multiple successive pieces of the outstanding balance of a single reverse mortgage. Last year there were 1.3 million of these pieces in existence, at an average of about $24,000. One year later, there are over 3 million pieces being serviced, at an average of about $12,000.
All in all, therefore, even in a time of reduced origination volumes, from a purely Ginnie Mae standpoint the HMBS balances and component pieces are continuing to increase substantially.
Numbers aside, our position with respect to the HMBS program remains unchanged. It is our mandate and core mission to use our government guarantee to support the lending programs of HUD, as well as our other partner agencies, thus attracting capital into the U.S. Housing System. We are enormously proud of the work that was done at Ginnie Mae to create the HMBS product, and we take seriously our continuing role in supporting HECM lending. We are fully committed to this program.
I will turn now to the topic of: what is Ginnie Mae thinking about these days in connection with reverse mortgages and the HMBS program.
Issue number one is unchanged from last year: sale accounting treatment, or lack of same, for HMBS transactions. As most of you probably know, evolving accounting standards have resulted in the classification of these as financings, the impact of which is highly unwelcome to most issuers, and has kept some potential issuers from participating in the market.
Because this situation has such a pronounced impact on our program, Ginnie Mae has been deeply engaged in an effort to find a constructive solution. This has been an extraordinarily complex and time-consuming endeavor, because of the unique nature of the program and the fact that the statutory and documentary underpinnings of the program predate and don’t fit neatly with the accounting standards and points of interpretation that are now critical.
Nonetheless, after an extensive examination of the issue from both a legal and accounting standpoint, and with the assistance of independent legal and accounting consultants, Ginnie Mae maintains its position, as follows: the securitization of HECM mortgages is to be considered an absolute transfer by the Issuer under the Ginnie Mae guaranty agreement. Accounting for the securitizations as financings, therefore, does not seem to us to be the best representation of the essential nature of the transaction.
Having undertaken this examination, and validated our view, we are prepared now to continue the dialogue with the accounting authorities, and represent our opinion as the sponsor of the HMBS program. We cannot be sure what course this dialogue will take from this point, but we feel that our long review has been beneficial, and we pledge to continue to make our best attempt to be communicative with stakeholders in the HECM/HMBS program in a manner that is respectful of the concerns and prerogatives of those involved in deciding the question.
I wanted also to touch briefly on two other issues that are not so much on the front burner, but that we at Ginnie Mae want to suggest are worthy of consideration and exploration by industry participants, as we all work to re-establish a sound footing for the future of reverse mortgage lending.
The first has to do with the value of HMBS securities in the marketplace, and the characteristics that drive that value. We are mindful of the extraordinary premium prices that these securities attract. Our belief is that going forward there will be increased scrutiny of the impact and use of these premiums, and the appropriateness of the interest rates that generate them. While in a general sense we view the premium pricing attached to Ginnie Mae securities as a positive attribute and prime example of the strength and value of the Ginnie Mae program, at the same time we do not wish to see these premiums result in distortions that detract from the program’s intended purpose. We are working closely with FHA in its exploration of the ways in which the HECM program can be modified to preserve its contribution, and believe that this is an area that will be explored as part of this. We also encourage the industry to continue its own examination of lending practices, and consider how to foster any improvements that are at the discretion of lenders and not dependent on defined program mechanics such as principal limit tables.
The second issue concerns the importance of a diverse HECM servicing infrastructure to support the future growth that we all wish to see. We are conscious of a long-term trend that we think could potentially be problematic in the future if it is not reversed: many of the institutions that have now left the scene or curtailed their participation in the industry maintained proprietary platforms for effectively servicing reverse mortgages. While there are heartening signs that newer entities have and will continue to replace the origination capabilities of these departed institutions, we see a dearth of newer entrants in the field of servicing. There is, consequently, a consolidation of servicing capability that we are concerned could be limiting from the standpoint of Ginnie Mae. In our conversations with current or prospective industry participants, we will be exploring ways in which the diversity and capacity of HECM servicers can be further developed so as to keep pace with the needs of a thriving, multi-faceted market.
As a final thought, and on a positive concluding note, I want to express just how impressive I find the resilience of this specialized segment of residential finance. This has been a protracted period of adjusting to a series of challenges; it can’t have been easy for anyone involved, and it isn’t over yet. I can only tell you that Ginnie Mae can be counted on to work in good faith with our partner agency FHA to enable this program to be successful and a long-term contributor to the many Americans who have relied upon it to date or will in the years ahead. Our ongoing relationship with the lending and investor community is crucial to this success.
Thank you again for this opportunity, and for your attention.
Remarks by John Getchis, Senior Vice President, Office of Capital Markets, Ginnie Mae
American Securitization Forum 2013
Concurrent Breakout Session: Government-backed Securitization Programs
Tuesday, January 29, 2013
Las Vegas, Nevada
I want to seize Phil’s [Bracken] enthusiasm for this and give you an orientation of what Ginnie Mae is doing in the most recent year. I think the purpose is to familiarize your with our business model, familiarize you with the targeted lending that we do, so as the housing policy discussion hopefully advances in Washington, D.C., people start to understand that there are really sub-markets and sub-constituencies that are being served by Ginnie Mae, and certainly Freddie Mac and Fannie Mae. So as we try to decide where private capital should be, where the government’s role needs to be and should be, we do that on an informed basis so that we know what we’re basically unwinding if necessary.
We’re a wholly-owned corporation of HUD, so our fiscal year ends each September like the Federal government, so we recently concluded in 2012. Our outstanding MBS portfolio that we now guarantee is at $1.34 trillion—that is a high. We add about $9 billion of net new production each month, the current rate at the market now. Our business model and our responsibility are solely to provide capital market liquidity to the government-insured lending programs. These consist of FHA, VA, Rural Housing and public Indian housing programs sponsored by various agencies of our federal government. We provide liquidity on average and consistently about 98 percent of all those loans that are originated end up in Ginnie Mae MBS. In FY 2012, gross new issuance was $388 billion worth of MBS. And most importantly, we are a self-sustaining corporation. We had a surplus of $600-plus million in FY2012. Our business model with its explicit government guarantee has not burdened taxpayers by requiring funding. We’re totally self-sustaining.
What programs do we maintain? Really three distinct programs consist and comprise those statistics. Our single-family program is the largest, the oldest – the MBS; that portfolio is about $1.2 trillion, and it has a compound annual growth rate of 21 percent since the beginning of 2009, as the crisis kind of took hold. So we have filled a void there through the FHA and VA lending programs.
We also are a primary lender in a multifamily space. Our portfolio is about $68 billion outstanding. The compound annual growth rate on that since 2009 has been a steady 14 percent year over year over year. It’s an important program that we do. We basically support not only multifamily housing but a considerable amount of health care; assisted living facilities are in there, as well as hospitals. Also FHA is one of the few government guarantee programs that have construction lending assigned to it and that is part its product mix.
Our reverse mortgage program portfolio is about $38 billion outstanding as of the end of the fiscal year, and it has, at least in the early part of its lifecycle, tremendous growth – on average over 123 percent year over year. I think you’re all familiar with some of the letters and comments and news with respect to addressing that program, so we’ll see some adjustments there.
Finally, a lot of what FHA/VA lending does is actually purchase money mortgages; 50 percent of our activity is purchased money, and the Ginnie Mae share of all agency purchase volume is 50 percent as well. In the fourth quarter of our year, that translated to $53 billion of purchased money mortgages that went through those recent three months.
With respect to all the regulations that keep coming down: As Phil indicated, that has a cost. But more importantly it’s going to have some behaviors that it creates, with respect to at least the Ginnie Mae space, a couple of areas where we start to ask questions and try to anticipate the effects.
Under the QM rule, we saw that FHA/VA programs have a seven-year phase-in with respect to QM. I think the issue there is certainly that it impedes what the private capital can and cannot be, but with respect to the existing programs you’re either exposed to safe harbor or you have a potential for presumption if your fees are too high. And with the trend of FHA raising MIP fees, certain LTVs, certain categories of loan type and loan size, it could get awfully close to that definitional line. So it will be interesting to see what the lender behavior is with either participating in that area or using that as a hard stop with respect to FHA.
Another thing that has occurred with respect to the QM rule is that FHA can collect post-settlement interests that, when a borrower prepays on the second day of the calendar month, the lender can collect the full 30 days of interest. That will end on January 2014. So with respect to our Issuers, that’s going to have some additional working capital requirements that need to be considered.
In the space of Basel III: Because of our explicit government guarantee, we continue to enjoy the risk capital arbitrized for regulated entities. Our most recent pronouncement was for high-quality liquid asset ratios that Ginnie Mae, MBS falls into tier one, which means it has no haircut and no limit in the amount that regulated entities can have in this category. And certainly I think you all know that the risk-based capital requirement as well is zero percent, similar to Treasury securities.
MSRs, unfortunately, get treated equally as all others. I think that would be a pressure on certainly regulated balance sheets on some of our larger Issuers, and particularly because that is a mark-to-market component. If we see rates back up here, those durations can extend the values of those portfolios. Even though the outstanding loan balances that they service don’t increase, the value of MSRs could jump with sensitivity.
I think there is always a lot of discussion about what the new securitization model needs to be, should be, etc. These are what I call critical elements, or even a tip list of where I think discussions need to get into some serious levels of additional detail. I think one, first of all, in setting housing policy or where government is or is not has to decide really: Do we want broad access to the global capital? We need rate buyers, we need credit buyers, but we also need store of a wealth of sovereign buyers, as well, in the product mix if we want to fund a large dollar amount of housing finance. I’m not saying a large percentage of housing finance; I’m saying a large absolute dollar amount of housing finance.
I think it’s also important, and this is where I think the Ginnie Mae model has proven a strong degree of success, that there is an alignment of interests from the lender all the way through to whoever has insurance risk, credit risk and certainly the investors as well. Under the Ginnie Mae model, the lender has the responsibility and obligation to meet time, principal and interest. I don’t know of any stronger alignment of interests of the loans that you originate than having that statement.
So Ginnie Mae doesn’t step in until the Issuer has financial incapability to meet that obligation. I think also when we set parameters of where government involvement is, etc., we need to have a market that has sufficient scale. That means that the human capital, the working capital, the investment capital, from dealers to investors, to Issuers, to servicers, need to be a worthwhile endeavor.
And finally, many times what gets lost in discussions is that – whether it is continuing with government involvement or private capital – we cannot forget the need for a well-functioning TBA market. That’s the functionality that allows originators to provide borrowers rate locks to a 30-year, fixed-rate mortgage, allows originators to hedge their position, and allows the market fulfill shorts, pair-offs, and deliver front months and forward months without much interruption.
I assure you that everybody at Ginnie Mae is quite busy. This is what we’re focusing on. It’s really three areas. One is improving a disclosure of the underlying collateral of our MBS pools. We’ve already provided information on our first-time home buyer mortgage insurance premiums, third-party originators. And we are committed to providing loan-level disclosure by the calendar fourth quarter 2013 for both our single-family programs and our reverse mortgage programs. We’re also working on our existing multi-class REMIC programs. We provide liquidity to the markets through single-family, multifamily and reverse mortgage structured transactions, so we continue to review those.
Things that we have done, things that we are considering: We’ve already adjusted our Callable Note program to reintroduce optionality by allowing the call price to be set above par. We plan to liquefy REMIC-trustee receipts so that underwriters don’t have to cover business days in which the MBS collateral is submitted for securitization in REMIC and that it cannot be used as secured collateral. So we’re fixing that, and we’re working on our platinum ARMs, which is really a liquidity and function and service that we provide. We’re rolling out the disclosure on that. We’re considering platinum ARMs, and we’re working to improve that product. And finally, the whole issue about having a market that has scale means that we will be doing some serious investigating of the possibility of consolidating the Ginnie I and Ginnie II single-family programs, to ensure that we have critical scale for the TBA market.
Remarks by Ted Tozer, President, Ginnie Mae
American Securitization Forum 2013
General Session: U.S. Housing Finance Reform
Monday, January 28, 2013
Las Vegas, Nevada
Moderator: Ted, we’ve seen Ginnie, you know, pretty strong over the past year. What do you think of the point that is raised here? What are some of these non-GSE specific rules about?
Tozer: I think it’s important for the structure as far as all of them over the next few years, we need to see an evolution in the private sector. The GSE has been setting the standard, but we’re down.
Moderator: Ted, any sense as to when the Administration might have more specifics to flesh out on any of the three options they explored two years ago?
Tozer: No, I think the Administration acknowledges that the housing – I mean, it’s in the process of recovery.
Moderator: Ted, what do you think about that? Because that sounds more like the Ginnie Mae model.
Tozer: You are correct, as far as the Ginnie Mae model, the guarantee is put in such a position where the guarantee is going to be called upon. It’s really interesting, because the issues that we’re seeing right now are with FHA and Fannie and Freddie Mac, as they are, first of all, at a loss in their calculation. They need to have accurate pricing. This is more imperative than what Ginnie Mae has for our structure; the lender actually is obligated to pay Ginnie Mae faster. We guarantee that lenders are willing to pay, that servicers are willing to pay, that borrowers are willing to pay, which is a different structure. It doesn’t have the guarantee to bring input at a lower cost.
Tozer: One thing that’s interesting, talking about the smaller footprint: The thing people don’t realize is that our housing market has gotten so large we’ve had to rely on private capital to support our housing market. In my experiences talking to investors worldwide, I don’t think it’s a long time before they ever get back and buy AAA securities in a guaranteed position. The concern we have is if we go back to 30% like Jim [Lockhart] talked about, I would think we would see a substantial reduction in the size of the market.
To share a story: I was talking to a large money manager from Asia, and he told me stories. He said, “Back in the late 90s, I convinced my organization to buy AAA, subprime securities. It didn’t work out well. Then we decided, you know, this market we think is settled down, so in 2006, 2005, we decided to jump back in again.” And he said, “It didn’t work out well.” And he said, “Third time is not a charm.” He said he’ll never get back into U.S. government or U.S. mortgage markets. He said, “In reality, I don’t even know where Arizona’s at.” He said, “I need a commodity. I need something I can buy – some large blocs, something that’s a commodity. I can’t afford the loss.”
So one thing I guess we need to talk about is: What size does our market need to be? Do we need to go to $11 trillion, $12 trillion, or do we shrink it back to $4, $5, $6 billion. One thing I see right now is that that the government guarantee does attract foreign capital; that is probably the question we should acknowledge.
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