The biggest Ginnie Mae MBS issuers cleaned house in the fourth quarter by buying a boatload of delinquent loans out of Ginnie pools, but its new president says that will not be repeated in upcoming quarters.
The Ginnie issuers realized that it no longer made sense to advance payments to investors on delinquent loans with 6% and 6.5% mortgage rates when their internal cost of funds is much, much lower.
In addition, they can always modify the delinquent Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) guaranteed mortgages and repackage them into new Ginnie MBS.
So they repurchased $57.6 billion in mortgages out of Ginnie pools in the fourth quarter, according to the secondary market agency.
The four largest Ginnie issuers — Bank of America, Citicorp, JPMorgan Chase and Well Fargo Home Mortgage — accounted for 68% of the buybacks.
The new Ginnie Mae president was not surprised by this unprecedented wave of buybacks, which totaled $186.5 billion in 2009.
"The fourth quarter is going to be an aberration," Ginnie president Theodore Tozer said.
The servicers were so pre-occupied with implementing the government's Home Affordable Modification Program (HAMP), he said, they allowed delinquent loans to accumulate in Ginnie pools.
"They could have bought back earlier and made a lot of spread," he said. But they ended up playing catch-up in the fourth quarter.
Tozer was sworn in six weeks ago. But the new Ginnie president had been involved in the Ginnie Mae program for three decades.
"I got National City Bank approved as a Ginnie Mae issuer in 1987," Tozer said in an interview.
After PNC Financial Services acquired National City in 2008, he continued as senior vice president for capital markets.
He noted that the large depositories have the resources to regularly repurchase mortgages once they become 90 days past due. And he doesn't expect to see "big slugs of buybacks" in 2010.
It is Ginnie Mae policy that MBS issuers can't remove a delinquent mortgage from a pool until the borrower has missed three consecutive monthly payments. Investors are "comfortable" with this policy, Tozer said, because they understand a borrower 90 days past due has very little chance of becoming current again.
But rising delinquency and default rates are putting a lot of pressure on the independent mortgage bankers.
"Buybacks are a tremendous strain on nondepositories that don't have a lot of cash to buy the loans back," Tozer said.
Independents also are getting squeezed by their obligation to cover delinquent loans and make monthly advances of principal and interest payments to MBS investors.
Ginnie carefully monitors any issuer once their delinquencies hit 5% of total issuance even though the issuer will eventually be reimbursed by FHA.
"Once a person breaks that 5% territory we really start looking at the risk we are taking on with that concentration," Tozer said.
Ginnie Mae officials are looking for a way to help the independent mortgage bankers without incurring too much risk. "We have had some internal discussions on what we can do," Tozer said in an interview. "But we haven't come up with an alternative yet."
The new chief executive stressed that he doesn't want to do anything that would jeopardize the integrity of the Ginnie Mae program, which issued the first MBS in 1970.
Ginnie Mae guarantees timely payments of interest and principal on MBS. GNMA ended 2009 with guarantees on $880.3 billion in single-family and multifamily MBS, up 38% from 2008.
Meanwhile, the new president is reviewing Ginnie Mae operations while looking for ways to improve the brand for investors and making the program more cost effective for MBS issuers.
He knows GNMA has experienced a fourfold increase in MBS issuance since the shutdown of the private-label securities market in 2007.
Issuance of Ginnie Mae MBS hit a record $414 billion last year, up from $270 billion in 2008 and $97 billion in 2007.
Yet Ginnie Mae has only 75 employees, including 13 that joined the agency this year.
After being treated like a second cousin twice removed from Fannie Mae and Freddie Mac for most its life, Ginnie commanded a 26% share of the securitization market last year.
In the fourth quarter, Ginnie's market share hit 34.5%, thanks to high purchase mortgage activity.
Tozer said the agency has made good use of its contractors and getting the most from its staff.
"This group is doing a great job," he said. "We are doing enough to get the job done, getting the blocking and tackling done."
But now the chief wants to take Ginnie Mae to a new level in terms of serving investors and issuers. He expects Ginnie Mae could get "quite a bang for the buck" with a few more resources.
"My gut reaction is we are going to need more people," he said, "to take the pressure off the people that are here. They are working hard to get the job done."
