How Ginnie Mae will start breaking down a key issuer concern this year
Ginnie Mae's issuers would like more than anything to see the government agency transition its mortgage-backed securities platform to loan-level functionality.
And this year Ginnie plans to look into what taking that step involves, Michael Drayne, acting executive vice president at Ginnie Mae, told attendees at the Mortgage Bankers Association's national servicing conference this week.
The platform's structure calls for the servicer of record for all the loans placed in the original pool to be one entity, according to Ginnie's 2020 progress report. That parameter presents a challenge.
It means even though the mortgage servicing rights associated with the loans in a securitized pool can be transferred, the loans themselves can't be separated.
That impedes MSR owners' ability to manage the asset as efficiently as they can in the competing government-sponsored enterprise market — which doesn't have this kind of restriction. It affects relative pricing in the secondary market as well.
There's no quick fix for the concern, but Ginnie Mae wants to start unravelling this thorny issue by identifying the hurdles involved, and then seeing what it can do to surmount them.
Below is a discussion with Drayne about the government agency's plan to identify challenges preventing mortgage servicing in securitized pools it insures from being bifurcated at the loan level. The responses are excerpted and edited for length.
You said at the Mortgage Bankers Association's servicing conference in Orlando that Ginnie Mae plans to look into what can be done about the inability to split loans out of securitized pools, which has ramifications for the secondary market for mortgage servicing rights. Can you tell me more about that?
For years and years, when it comes to things our larger bank and nonbank issuers would like to see improved about the Ginnie Mae securitization platform, this is generally at the very top of the list.
I'll give you an example. If a bank servicer with a big portfolio decides that what they'd like to do is keep their depositors’ servicing rights to maintain their relationship with those customers and sell off other servicing rights because they represent noncore operations, they can't do that with Ginnie Mae securities because you can’t break up Ginnie pools. They have greater control over the servicing in their conventional security portfolios.
Another example is a situation where an institution is a good servicer for performing loans but once loans get to a certain degree of difficulty when it comes to performance, they want to bring the servicing to another entity that specializes in that kind of thing. They can't do that with Ginnie pools either.
Are the challenges that prevent loan-level divisions contractual, systems-related or both?
It's a little of both. That's what we're exploring right now. What are all of the things that would need to be changed? Some of it is contractual and some of it is mechanical or technological. That's going to be the basis for our exploration of this topic. It's a long-term project.
What were the catalysts for that exploration?
We first talked about this in our Ginnie Mae 2020 modernization plan. We said then we know this is an issue and we are going to look at this, but then went on to make more of an explicit commitment in the HUD housing reform document than we had previously. It's important because it's a factor in liquidity. We always have to be paying attention to perceived valuation differences between government servicing and conventional servicing. We don't want big gaps to open up because, if they do, it's going to raise the cost of homeownership to the borrowers that are served by the government programs.
This is a big liquidity disadvantage of government servicing versus conventional. That's why we're trying to address it. We want people to minimize the extent to which they discount government servicing, which in recent years has been an issue.
A lot of the things that affect liquidity Ginnie Mae can't do much about. Some of them have to do with the servicing programs. I know the Federal Housing Administration is very focused on improving the cost of servicing FHA loans. The administration is working to address the risk of perceived False Claim Act penalties. This is the single largest issue that affects liquidity that we at Ginnie Mae can do something about.
Where is Ginnie right now in that process of exploring how this issue can be addressed?
We're at a very early stage. The effort to go through the whole program, identify everything that would need to change, and compile all that will take much of this year. Later on this year we think we'll have that done. Then we'll say to ourselves and various entities in the industry, in order to keep going down this path that we've set for ourselves, here are the things we would need to change.
So the likely outcome is a report around year end?
The request for input process we've been using has gone pretty well for us, so maybe we would use that. That's possible, but we haven't decided yet.