How nonbanks' rising government mortgage market share helps Ginnie Mae

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Ginnie Mae is examining whether the shift in business to nonbank issuers has implications for its ability to guarantee mortgage securities payments beyond those it has historically looked at.

Key questions for Ginnie when it comes to its counterparties revolve around liquidity, capital and potentially higher risks that nonbanks, which face lighter regulation and oversight, could pose relative to banks.

One of Ginnie's conclusions is that ensuring nonbanks remain strong counterparties will depend on identifying and nurturing their advantages, such as their diversified business models and the current strength of their liquidity, while also guarding against their risks.

Following a series of recent issuer meetings, Acting President Maren Kasper detailed some of her key takeaways.

Nonbanks are more numerous and varied than banks

The wide spectrum of nonbanks in the market is something Kasper says may be underappreciated in the market today.

"A lot of times we talk about depositories vs. nondepositories, but we need to go one level deeper and look at the various nondepository business models. They can vary depending on how you originate, whether your business model is reliant on forward originations relative to servicing income, whether you are hedging and what your hedging strategies are.

"That is something I continue to look at and make sure everyone in the market continues to appreciate going forward," Kasper said. "No two nonbanks are the same."

"I think it's probably important to highlight what the benefits of the nonbanks are in our market," she added. "Obviously there's a financial concern in that we want to make sure that there's liquidity, but what [they do] offer for Ginnie is we have a more diversified issuer base. Typically we were heavily concentrated among five banks, which was a good position to be in, but you were concentrated in terms of your exposure. Today a bank, Wells Fargo, is our largest issuer but no one issuer is really more than 10% of our portfolio. So we're more diversified."

Nonbank liquidity is in good shape

"In terms of key conclusions, I think one thing that stood out to me first and foremost was that the current liquidity situation is healthy," said Kasper.

However, Ginnie still wants to keep monitoring nonbanks' liquidity and ensure they are prepared for the day when a weaker economy could strain it.

"We've had very favorable macroeconomic tailwinds that have supported the [overall] market even though the mortgage market was under pressure through much of 2018," Kasper said. "Therefore, we view the healthy environment as a positive thing. But that is to be expected given the macro landscape. At the same time it's also our responsibility to plan for a time when the macro trends are less favorable and more adverse. Nonbanks in our program have done a very nice job of managing the liquidity needs of their business in today's environment. We're looking at that as kind of the baseline."

Nonbanks rely on banks for liquidity

Nonbanks' liquidity is strong thanks to warehouse financing from banks, Kasper noted.

"Another major observation that we had was that while [some] banks have exited the business directly, indirectly they are the backbone of the mortgage finance system. They are providing financing arrangements for the nonbanks in the program, and while we certainly think that's healthy, it brings more uncertainty to the program from Ginnie Mae's perspective, because the banks aren't our counterparties, the nonbanks are," she said.

"If a bank is financing a nonbank, that nonbank is on the hook for making the principal and interest payments, and the bank can pull that warehouse line nearly at any moment. There's a lot of flexibility in all those covenants banks have given themselves. So the banks are giving themselves the optionality to be in the business or not, while the nonbanks are making more of a commitment. The banks have an obligation to Ginnie Mae to some degree, but not to the same extent that they did when they were 80% of our portfolio. They don't have the downside that they once had as a direct issuer."

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