There has been a recent decline in the number of investors actively buying Ginnie Mae servicing rights, an asset some nonbank mortgage companies use to help secure financing for their operations.
"People tell me when they put a block out they may have only one or two bidders on it," Ginnie President Ted Tozer said.
That worries him because Ginnie has been increasingly reliant on nonbank issuers, and those nondepositories rely on MSR sales or financings for liquidity in a way Ginnie's traditional bank issuers don't. Issuers are responsible for payments to investors in the mortgage securities that Ginnie guarantees.
If the decline in bidders translates into too much of a decline in MSR values, a source of nonbank funding could be at risk during a year when Ginnie's issuance volumes have boomed.
"My biggest fear right now is that we might be running out of servicing capacity," he said.
While the limited number of investors hasn't stopped Ginnie MSRs from trading or issuers from doing their jobs to date, Tozer fears that in a worst-case scenario it could affect issuers' ability to advance payments to securities investors.
Tozer had several initiatives in the works aimed at minimizing the risk of disruption to Ginnie payments. One is for issuer stress tests that would include nonbanks that don't normally undergo them. However, the limited resources the government agency has available to keep up with high securitization volumes has forced it to put a lot on the back burner.
"Right now, everything's going relatively well, but I'm thinking about the next recession," Tozer said.
Without a broader view of Ginnie issuers' collective liquidity facilities and how they might be affected by stress, it is hard to say precisely how much issuers rely on MSR sales and financing.
It is clear there has been more demand for MSR financing, but more of it tends to be secured by Fannie Mae and Freddie Mac servicing rights, which have been widely said to have more favorable contracts acknowledging their positions in MSR financings. To address this, Ginnie is considering further revision to Its acknowledgement agreement.
Several factors have contributed to a decline in bidders for Ginnie MSRs.
MSRs in general tend to have lower valuations in low-rate environments, and the implementation of Basel III rules that affect banks' risk-weighting of assets has effectively reduced the amount of MSRs banks find attractive to buy. Although they are active in the market, they are more likely to buy Fannie or Freddie's MSRs.
Most loans the Federal Housing Administration insures end up in Ginnie-insured securities, and there are liabilities linked to FHA loans that have caused some servicers such as JPMorgan Chase to pull back from the market.
But as Ginnie Mae issuance's boom shows, overall funding of the loans remains strong as FHA mortgages are often the best match for the needs of entry-level borrowers that are important customers for many lenders.
"FHA definitely does meet the needs of first-time home buyers," said Brian Vieaux, a senior vice president in Flagstar Bank's wholesale and correspondent lending division. Flagstar is a Ginnie issuer and subservicer.
And while fewer investors are buying Ginnie servicing for several reasons, it still has its attractions. So its investor base may be down but not out.
If rates rise as forecast, and a stronger economy accompanies higher rates, the MSRs may be worth more in the future.
"It's a good asset at the end of the day," said Ed Fay, the chief executive officer of Fay Servicing.