By Scott Olson
This Op-ed appeared in National Mortgage News on February 23, 2019.
In tightening of supervision of its smaller issuers, there are reports of Ginnie Mae not granting full commitment authority requests, and raising net worth and liquidity standards above publicly posted levels.
These actions are causing some smaller independent mortgage bankers to reassess their commitment to the Ginnie Mae program and are straining their relationships with warehouse and working capital lenders.
Because of this, Ginnie Mae should not overreact in supervising smaller, more diversified independent mortgage bankers.
The Community Home Lenders Association recently released a 14-page report on Ginnie Mae that makes this point in more detail. This report builds on CHLA testimony before the House Financial Services Committee in late December.
The key takeaway: Supervisory tightening toward smaller IMBs that is disproportionate to their risk could undermine Ginnie Mae’s statutory responsibility to facilitate consumer access to FHA, RHS and VA loans — without any corresponding benefit in risk reduction.
In recent years, as many banks curtailed or abandoned FHA loan origination and correspondent lending, IMBs stepped up their mortgage lending to fill the gap.
A 2017 Ginnie Mae report concluded that “nonbanks have led the way” in improving access to credit for low- and moderate-income borrowers — a critically important function in an age of overly tight credit.” There has been a significant increase in the IMB’s FHA and Ginnie Mae market share in the years since the 2008 housing crisis.
Over these last 10 years, Ginnie Mae has been consistently profitable, producing $10 billion in cumulative net profits. Ginnie Mae currently has $25.56 billion in equity and $20.9 billion in “cash and cash equivalents” on hand, available to pay claims. Last year, it earned $1.73 billion in net income, which followed $2.1 billion in net income the year before.
The principal reason Ginnie Mae was consistently profitable throughout a housing crisis that pummeled almost all other major mortgage market participants is simple. Ginnie Mae has almost no credit risk; it merely reinsures pools of loans that are either 100% federally insured, or, in the case of VA loans, the federal government covers the first 25% of losses.
Thus, Ginnie Mae’s primary financial concern is not credit risk, but “advance risk.” Advance risk comes into play only when both a borrower defaults and a Ginnie Mae issuer does not advance the missed payments. Such risk is limited, since advances are generally recovered when a claim is made on the underlying government-insured loan (and Ginnie Mae can even make a profit in some cases).
Commonly, Ginnie Mae resolves such situations by transferring the portfolio of a failing issuer to another servicer, which then assumes advance responsibilities. Often this is done without a loss. However, sometimes Ginnie Mae incurs a loss when it must provide assistance to compensate for contingency risks (e.g., that some of the loans might not be properly insured).
Historically, Ginnie Mae losses of this kind appear to be fairly minimal. However, it is appropriate for Ginnie Mae to prudently supervise its issuers and counterparty risk. Ginnie Mae recently has taken actions, which the Community Home Lenders Association generally supports, to enhance issuer supervision — including moving toward stress testing of its largest issuers and limiting guarantees on churned VA loans.
The first point is significant. Ginnie Mae, its inspector general, and others have pointed out that Ginnie Mae’s biggest risk is with its largest servicers — for the simple reason that risk is concentrated and large portfolios are more difficult to transfer to another servicer.
So Ginnie Mae should not overreact in supervising smaller, more diversified IMBs. There are numerous ways to achieve balanced supervision detailed in CHLA’s report. Most importantly, Ginnie Mae should grant commitment requests consistent with an issuer’s previous levels and should not impose higher net worth and liquidity requests than are publicly posted.