Ginnie Mae is being bombarded by requests from small mortgage banks to become issuers of its MBS. Fewer large banks are willing to purchase their loans, so the mortgage banks are throwing themselves into the arms of Ginnie.
They have become spooked by the exit of Bank of America, Ally Financial and MetLife from correspondent lending. Wells Fargo may have intensified their worries by refusing in July to fund mortgages through its wholesale channel from independent mortgage brokers.
But Ginnie officials are reluctant to take on more lenders, especially those who do not have the financial strength to share the risk of loan defaults. The agency is considering raising minimum net-worth requirements for its MBS issuers to thresh out weak applicants.
"We're thinking long and hard about our minimum requirements right now," says Gregory Keith, Ginnie's senior vice president and chief risk officer. He found many applicants are ill-equipped for the role.
"We're getting people with fairly low levels of capital, fairly low levels of sophistication and understanding of the program, and low levels of investments in technology," Keith said. "Some new applicants think they're ready for the NFL but they maybe need to stay in college for another year."
The net-worth requirement should be raised to between $3.5 million and $5 million, said Joe Murin, vice chairman at the consulting firm Collingwood Group and a former Ginnie president. It is currently $2.5 million; it was $1 million in 2010.
"It's well justified and they should go to $5 million, but they'll probably jump to at least $3.5 million," initially, Murin said. "They approved a lot of folks that just didn't pan out, and now they have to rebuild a more diverse stable of issuers."
Ginnie does not purchase mortgages but rather guarantees the timely payment of principal and interest on $1.3 trillion of outstanding securities.
The underlying loans are already insured by other agencies, predominantly the Federal Housing Administration (FHA), so investors do not have to worry about losing principal.
But Ginnie has to make sure that when borrowers fall behind on their mortgage payments, the servicer is still able to advance payments to bondholders until the loan is resolved. If a Ginnie loan goes delinquent for 90 days, the servicer may continue to make the bond payments or buy the delinquent loan out of an MBS pool.
At the end of June, 9% of FHA-backed loans were either 90 days or more past due or in the process of foreclosure, up from 8.9% in the first quarter and 7.8% a year earlier, according to the Mortgage Bankers Association.
Because it can take up to two years to process a foreclosure these days, servicers can be expected to advance principal and interest to bondholders for an extended period of time. Those advances can quickly add up, eating into a mortgage bank's profits. A lack of cash to pay investors is the primary reason for servicer defaults.
"When you have a higher net worth, it means you have better financial systems and capabilities for reporting and compliance," says Barb Cutillo, the chief financial officer at Stonegate Mortgage Corp., a Ginnie issuer. "When a government loan goes bad FHA insures that, but Ginnie has to ensure that companies can cover the principal and interest payments."
Last year, Ginnie approved 35 new issuers out of 85 applicants. It currently has fewer than 300 issuers overall.
Some lenders have complained about the slow approval process, which can take 10 months to a year, largely because applicants usually fail to submit all the materials needed. Ginnie has hired a handful of employees to oversee the new issuers and to create more sophisticated models that track stresses to its portfolio like higher unemployment.
Part of the reason for the dearth of issuers is that many applicants do not have the ability to collect data, trade the bonds, deal with broker-dealers and report on a continuing basis a high level of detail about the bonds, Keith said.
Though most mortgage bankers do not service loans they originate, they are considering becoming servicers because of the higher prices paid by investors for the government guarantee for Ginnie securities.
Mortgage bankers want to pocket the higher spreads for Ginnie securities and often "treat their company like an ATM," taking out a majority of income every year in dividends, Keith said.
When Ginnie's current president, Ted Tozer, joined the agency in 2010, he spoke at many events about reducing the concentration of large banks. That was misinterpreted as an invitation to all comers.
Combined with the pullback by some of the largest banks, which can be attributed in part to Basel III capital rules, fear has become a contagion among small originators.