Homeownership Crucial for 'A Stable Democracy': Departing Ginnie Chief
After seven years as a major guiding force at Ginnie Mae in the wake of the financial crisis, Ted Tozer is set to leave the secondary marketing agency on Friday.
During his time with Ginnie Mae, Tozer expanded the agency's portfolio tremendously and revisited its handling of counterparty risk management. Moreover, he remained a consistent voice calling for more resources and funding for the agency at a time when demand was growing for the loan products it packaged into securities.
In an interview Monday, Tozer reflected on his accomplishments at Ginnie Mae and the challenges facing the industry and the agency in the years ahead — from the micro level (ensuring liquidity for servicing rights) to the macro (enacting comprehensive housing finance reform). The following is an edited transcript of the conversation.
What achievements would you consider to be the most significant from your time at Ginnie Mae?
TOZER: First of all, when I was a lender, the [Home Affordable Refinance Program] really hadn't been as effective as it could have been. Using my experience as a lender, I worked with the various parties and became the administration's point of contact for the relooking of the whole HARP program, getting the lenders and the [mortgage insurance] companies together.
Another thing I did: I was really concerned when I took this job that Ginnie Mae had two programs, Ginnie Mae I and Ginnie Mae II. You really couldn't afford to have two programs. There wouldn't be the liquidity. So I really wanted to phase out the Ginnie Mae I because the Ginnie Mae I to me was an old program that dated back to the 1970's that really was out of date. When I got to Ginnie Mae in 2010, only about 40% of our business was done in the [Ginnie Mae] II program and about 60% was done in the [Ginnie Mae I program]. Today, it's about 95% in [Ginnie Mae II].
As a lender...I was always frustrated by the fact that Ginnie Mae never seemed like it took a leadership role in the industry. It never really took the position where it was really going to support the industry more than it had to. It was like most government organizations — it did what it had to do. I really wanted Ginnie Mae to become a leader in the industry and to become an organization that's based on customer service. We've been successful in building Ginnie Mae's prominence up.
What do you see as the biggest challenges moving forward for the mortgage industry in general and for Ginnie Mae in particular?
The biggest challenge for the industry is I feel like we have to get a balanced approach. At Ginnie Mae, we really have four stakeholders: We have the borrowers, we have the lenders, we have the taxpayers because we're guaranteed and we have the bondholders. Everyone wins and loses. What does it take to have good protection for the consumer without driving up costs or driving lenders and bondholders out of the market? The key is finding a really good balance among the stakeholders to make the industry work as effectively as possible.
As far as Ginnie Mae, I think Ginnie Mae's biggest challenge is we've been too successful. We have grown phenomenally. We did so much that was transformative for the industry, but we did it without really any hiccups. That's why I had a tough time getting the resources and getting the support to really be able to set Ginnie Mae up with the proper staffing and the flexibility we need to be successful. We really have to be able to educate people about what Ginnie Mae is all about…with the really limited resources that we have.
What is your take on the state of mortgage servicing rights financing?
We have to create as much liquidity as we can for MSRs. Once you have a very liquid asset, it's easy to get people to take it as collateral. The biggest challenge is to work on trying to make sure that MSRs are as transferable as possible. And that means working with regulator and the FHA to try to understand exactly what liability there is and what it means to be a servicer of [Federal Housing Administration, Department of Veteran's Affairs and Rural Housing Service] product.
A challenge we have too is this indication of the movement away from the banking sector. In the past, MSR financing was not as big of an issue because banks would normally just use FDIC-insured deposits or CDs to fund their mortgage operations and their servicing operations. Now the only thing the mortgage bankers have as assets is MSRs. It's forced us as an industry to try to allow the independent mortgage bankers to liquefy their balance sheets as much as possible. What we're trying to do at Ginnie Mae is to support the industry through the various evolutions that are occurring. That's why MSR financing is so important, and that's why we're trying so hard to make it as successful as possible. We're trying to grow the mortgage industry until the banking sector decides to come back to the mortgage banking business in the future.
What are the lessons that have been learned about housing policy from the Obama administration that you would share with the incoming Trump administration?
The thing I would tell them is the mortgage process is a relatively complicated process and it truly is an ecosystem. It's really something that's got to be kept in balance, and once it gets out of balance then you can have problems with access to credit and costs to credit. I would encourage them to look at this whole concept of the costs and repercussions of trying to make changes.
For example, if you put a regulation in for consumer protection, which sounds good, actually try to determine what it's going to cost. Are you giving the consumer the value that cost is going to be? The lenders are going to pass to the consumer the costs of making that change. People are realizing it really is a pass-through-type situation. You need to be aware of that when you're making decisions. To keep credit accessible in a very efficient and cost-effective manner, you've got to make sure that you don't leave any one of those groups feeling taken advantage of in the whole process.
To some degree I don't think the Obama administration fully appreciated the value of what Ginnie Mae did. You're trying to fix Fannie and Freddie and do these other things. Should you be looking at a holistic approach to comprehensive housing finance reform? You've got this process at Ginnie Mae that could meet most of what you're trying to accomplish with housing finance reform already in place.
Should there be a concerted effort to persuade banks to return to the mortgage market?
You use the word "persuade." I think we need to create an environment, mainly in servicing, where the banks feel it's something they can make money at and not have the reputational risk. The biggest problem you have right now is mortgage bankers have always been large originators of mortgages. They had the sales forces. But as far as servicing, it usually was done by banks because banks were the perfect servicers. They have plenty of cash because they can raise deposits relatively cheaply, so they could fund themselves relatively cheaply. We need to find a way for the banks to feel comfortable that they know their costs and know what they're up against as far as the regulatory environment.
In a normal situation where banks would feel comfortable coming back into the market, they would be buying some of these independent mortgage bankers that have these big servicing portfolios. They'd be coming in and not trying to build out their own default management. They'd be acquiring it and buying it. But right now, I don't see the banks buying these independent mortgage bankers. And that indicates to me that they're still on the sidelines making sure that by coming into the servicing space they're going to be treated fairly. We're going to run into a limitation as to how much more the mortgage industry can grow as far as the servicing capacity if the banks don't get back in.
What is the solution to the housing affordability problem, particularly keeping in mind the debate regarding the importance of the FHA versus the private sector, including mortgage insurers?
Comprehensive housing finance reform. Because right now you're in a situation where you have Fannie Mae and Freddie Mac, who, through…their loan-level price adjustments and high guarantee fees, are making it very cost prohibitive for anybody who doesn't have really stellar credit and a very large down payment to economically make sense for them. Because MI companies are attached to Fannie Mae and Freddie Mac, you're in a situation where they are kind of eliminated.
If you were in a situation today where we were allowed as Ginnie Mae to take loans into our securities that are insured by MI companies as well as FHA, VA and Rural Housing, two things would happen. Potentially you would have a few more banks coming into the Ginnie Mae space for servicing because they're more comfortable with MI's than they are with FHA. Secondly, on day one, the pricing on conventional loans would drop dramatically especially if you don't have stellar credit or a large down payment. Because you put the MI company-insured loans in Ginnie securities, each individual issuer becomes basically Fannie Mae and Freddie Mac, and they decide what their cost of servicing is going to be for the [loans with a] higher propensity [for] delinquency. The fees they would charge and the way they built their cost structure I'm sure would be less than what Fannie and Freddie are charging. I think you would see an opening of credit if there was an opportunity to have our lenders take on conventional loans and not necessarily be tied to FHA. To give them the option to bring conventional loans into the space would take a lot of the pressure off FHA, because right now they have nobody at FHA they can use for credit enhancement for those higher-risk loans.
But that has to come from comprehensive housing finance reform. That's the key of really determining, how do we make credit accessible and allow the private sector to really play to their strengths?
You were instrumental in revisiting Ginnie Mae's counterparty risk management. Where does that stand today and how should it be approached in the future?
By having a situation where so much of our issuer base not being financial institutions, meaning we can't rely on the FDIC or the [Office of the Comptroller of the Currency] to do the counterparty risk analysis for us, it just forces us into that area. We're continuing to evolve to try to understand what the tipping points are and what issues we need to put our arms around. That's why it's imperative that we get the financing, the resources and the flexibility to hire the right people to be able to move forward.
When I got to Ginnie Mae back in 2010, we had four banks that were probably 75% or 80% of our business. Now, that same 85% is done by 80-some issuers, so we have a tremendous amount of deconsolidation. But the counterparty risk is phenomenal now because we have so many organizations we have to look at. That's why I'm hoping with the new administration that they realize they've got to let us continue to evolve and continue to invest in people and systems to be able to really understand where our risks are at and get ahead of any kind of issuer that may get into financial trouble to head off defaults.
The issue with counterparty risk is you've got to be proactive as much as you can be. But to be proactive, you've got to have the resources and the people. With the scorecard, I talked about it in theory, but it was the people at Ginnie Mae who got down into the components. It's unparalleled the talent we have at Ginnie Mae. But we've got to keep building that infrastructure to move forward.
What are your plans for the future?
It's hard to believe it's been seven years. I haven't thought much about it. I've been really focused on trying to continue to help Ginnie Mae out and to move forward with everything that's been going on in the last year or so. Moving forward, I'd really like to do m something that really supports the industry and helps educate people about Ginnie Mae's abilities and how we can make the housing system work as well as it can be. I'm taking the tack that I'll take a month or two off and not really worry about too much.
I really want the industry to work well, so really I'm looking for opportunities that enable me to continue to help the industry work to help the American people. The dream of homeownership is so critical to the American psyche. I want to continue to try to help the industry continue to evolve to help people meet that need and actually become better Americans. I was talking to a person from another country that's moving now into homeownership. He said, "I really think homeownership is the key to international stability." What he's seen in his country is that as people own a little piece of their world they become a little more concerned about the world. Because now they have something to lose. He said, "I really believe the concept of homeownership will stabilize the world because people will not be willing to lose their little patch of the world." It really hit me when he told me that. That's why I think it's the epitome of American society. Homeownership is critical to our ability to continue to prosper and have a stable democracy. I'd like to be a part of it.