With the private-label mortgage market virtually nonexistent and the GSEs in trouble, Ginnie Mae has come to the forefront to fill the void that these other sources of credit have left.
Ginnie Mae President Ted Tozer met with ASR Editor Karen Sibayan to discuss the agency's current role in the volatile mortgage space and the initiatives it has come up with to help its investors, issuers and servicers alike.
What is the difference between the Ginnie Mae of today and pre-crisis?
Ginnie Mae's current role in the market shows the value in our model. When the private-label market and the other players dominated the market, we were in a situation where the [Federal Housing Administration (FHA)] and the [U.S. Department of Veterans Affairs (VA)] were smaller players. We had to downsize and still support those functions appropriately. But then there was the demise or the categorical hibernation of the [private-label securities (PLS)] market, and with Fannie Mae and Freddie Mac having issues, we were able to ramp up fairly quickly and were able to support a fairly substantial position. That's what Congress created us to do - to fill in the gaps whenever private capital retreats. I think this has been an incredible example of our ability to ramp up quickly by using our model. I think the size we are at now has also shown how effective our model is because we are able to move through large numbers of loans and handle a large number of payments to our investors, but at the same time we are able to evolve the program to make it better for lenders as well as for capital market participants.
Can you illustrate this with an example?
A year or so ago we were able to change our pooling requirement for our multi-lender securities program, in which most of our small lenders participate. Lenders can take one loan and get it certified by their custodian and they can get their security back. At that point, they can sell it or use it for collateral for financing. It enabled them to turn out their warehouse line quicker and get the loans off their balance sheet. So even with the large amounts of volume that we were doing, we were able to support the market in less obvious ways.
How have you responded in terms of staffing to support the growing volume?
When I came to Ginnie Mae, the staffing was around 69, but now we're up to around 86. We are probably looking to be around 103 in the next few months and just continue to grow accordingly. Our biggest goal is to get our 2012 budget through to Congress for appropriations purposes. I think most people have been very comfortable that we have been very effective in the use of taxpayer funds and that the additional staff we'll bring in will actually pay huge dividends as far as risk management and keeping the losses to the guaranty fund at a minimum or eliminate them completely.
Can you talk about the changes to Ginnie Mae/FHA buyout rules?
FHA changing their program helped us out. Prior to changes [in buyout rules] taking effect, if borrowers were delinquent, they would be allowed to capitalize all their monthly payments into a new loan to an increased amount, modify it and then drop the interest rate [on the loan]. Borrowers would then see if they could make their payments under that new payment plan. GNMA allowed servicers to buy these loans out of the pool once they became delinquent. They modified these loans and brought them back into a new GNMA pool. However, the loans were actually re-defaulting within the first year; around 50% of them did not get through the first year without going delinquent. Since we allowed our servicers to buy a loan out of a pool once it became 90 days delinquent, the pools were prepaying and we were experiencing huge prepayment speed issues. What the FHA did was allow borrowers going through a modification process to capitalize the payments, but the modification is not permanent unless the person has made three timely consecutive payments on the new modification. We are not going to allow servicers to buy loans out of the pool until the modification has gone through its trial period, which means you cannot re-pool a loan until it's gone through its trial period, and because of that we think we are going to substantially slow down the re-defaults on new GNMA pools.
How big of an impact do you think this would be?
It should be substantial, although the FHA was saying that when it came up with its criteria that it had listed in its Mortgagee Letter, it pretty much covered all the situations where a loan would become delinquent, such as borrowers having too high of a debt service in terms of their income and borrowers having been in a loan modification program before that failed. The FHA found these trends that developed through the vast majority of loans that re-defaulted. My goal is that these would get to the point where they won't prepay or go delinquent more than any other FHA loan so the investor community will feel more comfortable.
What other programs do you have to help servicers?
I had mentioned before about our one-loan program. We are also trying to find a way for our servicers to pledge their Ginnie Mae servicing to a bank for a line of credit, because all of our servicers are being stretched thin financially right now to make their P&I advances. From our perspective, we think that this is really good, as it aligns the interest of our servicers with Ginnie Mae. They need the funding, so [this program] makes them stronger, but it helps us too because the bank is taking our servicing as collateral and can also make sure that that servicing is done properly. If the servicing becomes worthless, banks would lose the collateral for their line.
What has been the response to this initiative?
We have worked with one lender so far. Since then, we've had some other banks contact us, which we're excited about. Because if we get the banks to feel more comfortable with taking the servicing on our terms as far as collateral, it would really end up as a tool for our mortgage bankers. With the first deal, [the mortgage banker] had to keep going back to his banks to convince them to use our documents. But if we have a bank that is already comfortable hopefully that would help mainstream the program, with the banks buying into it and not having the mortgage bankers sell the concept to their local banks.
What do you think of the new FHA policy to extend the forbearance period for unemployed homeowners?
I think everybody is all for helping the borrower as much as they can. The key thing from my perspective is that at Ginnie Mae we're more involved with investors and making sure that they get their P&I in a timely manner. Really getting down to borrower issues is more [the purview of] the FHA and VA. Our discussions are more toward whether the forbearance program is going to cause financial issues as far as the servicers having to advance interest and P&I for a longer period of time - maybe [having to] pledge their line of credit and raise some cash. Our concern is more the financial solvency of our small- to medium-size lenders.
Do you parse out FHA and VA loans that are in your pool?
[These loans] are comingled in our pools - so as far as the credit profile we really don't [parse them out] . The nice thing about our GNMA II program, for instance, is to be TBA eligible you would have to go through a multi-lender program. So an investor who buys GNMA II is buying a pro-rata share of a blend. The investor gets a national blend of FHA/VA loans and low and high FICO - that's one of the reasons why the GNMA II program has become more of a positive with our investor base. The issue with GNMA II was that there were not a whole lot of them prior to 2003 to 2004 since there was a tighter range of interest rates you can put in there. The spread between GNMA Is and GNMA IIs was so large that most lenders did not use the GNMA II program. When Ginnie Mae changed the interest rate band, the spreads of Is and IIs collapsed, and since then the IIs have become a larger piece of the program.
What are your goals for these programs?
My goal is to give lenders as many tools as possible to raise funds for the various programs with FHA/VA and so forth. My goal is to make GNMA I and GNMA II pricing as good as they can be and let the lenders pick whichever one they want to [participate in]. I just want to make sure that they are pricing as aggressively as possible so that the borrowers will get the very lowest rate possible in these government programs. Whichever way GNMAs price will reflect on how much a borrower would pay for a FHA/VA loan, so we try to keep those rates as low as possible for the borrowers.
What impact did the U.S. sovereign downgrade have on GNMAs?
Because of the volume generated since 2008, GNMA is still a very liquid security with a government guaranty, so [even with] the downgrade, it is still relatively pristine. Also, a lot of our investors over time have looked at our financials - we generate financial statements just like any major corporation - and right now we have between $16 and $17 billion of capital. We also have about $1 billion worth of loss reserves. So most investors take a lot of comfort that, even without the government guaranty, Ginnie Mae is well set financially. We have never gone to the government for money, and we are self-funded.
Are Ginnie Mae's loss reserves sufficient?
It's very substantial. The way Ginnie Mae operates is that we are concerned only if an issuer cannot make its P&I payments to our investors. At that point, we are obligated to find a new servicer, and our guaranty is only to the fact that we have to subsidize the transfer of that servicing. So, if I were the servicer and 90% of the loans in a pool were performing, as long as the cash flow of the 90% that were performing would be enough to cover the cost of the 10% that are delinquent, we can transfer without a loss to the guaranty fund. That is why we are different from Fannie Mae and Freddie Mac. How much we need to subsidize the transfer of that servicing and how much of that servicing has lost value -that is really all we are covering through our guaranty fund. That's the beauty of our program and the reason why we have had minimal losses. It's a situation where the government guaranty is worth a lot from the perspective of low interest rates for the consumers and on our securities. Most of our guaranty fee is going to the U.S. Treasury.
Do you have an increase of investors because of the fallout from the GSEs and the PLS market?
It's really hard for us to say much about investors since GNMAs are held in book entry form. We really do not know who owns them. However, we have talked to Wall Street firms and a lot of foreign investors, especially who have gotten out of the PLS market and Fannie Mae and Freddie Mac [securities]. Although some of them are not new to GNMAs, they have increased their concentration [in the sector] because they were concerned or their investment committees were unsure about PLS and the GSEs. But, as far as the number of investors we have picked up, it is hard to tell.