No one wants to watch a re-run of the 2008 Financial Crisis, especially not the Mortgage Bankers Association (MBA), which today announced its proposal to develop a new product for Ginnie Mae securitization.
The idea to modernize Ginnie Mae's liquidity structures was not the MBA’s originally, but Ted Tozer's. The former president of Ginnie Mae is currently a fellow of the Urban Institute’s Housing Finance Policy Center (HFPC) and Board Member for PennyMac.
“It's really great that the MBA and other people are finally beginning to realize that the independent mortgage bankers and their limited availability of funding is really critical,” Tozer told NMP, speaking about the product and the MBA’s proposal. He believes that creating a new product is a more difficult and riskier endeavor, instead of having Ginnie Mae use the tools already at its disposal.
The CHLA agrees on the concept to implement further safeguards for nonbank lenders. Scott Olson, Executive Director of CHLA said,"Although CHLA has not had the opportunity to analyze this comprehensively, it is helpful that MBA is adding to the debate over the need for more liquidity for Ginnie Mae issuers," Olson wrote in an email to NMP.
"Whether it is CHLA's PTAP proposal or Ted Tozer's proposal on the subject or MBA's plan," Olson continued, "the important thing is for Ginnie Mae to take actions to increase issuer liquidity, which would help both borrowers and issuers and reduce program risk."
Either way, the proposed new securitization product is an attempt to generate more private capital sources of liquidity to support Ginnie Mae issuers and safeguard vulnerable lenders in the event of market stress or a severe economic downturn.
Nonbank lenders have reclaimed their throne in the years following the 2008 Financial Crisis. Retail lenders have taken up a larger share of the market by originating and servicing more FHA, VA, and USDA-backed loans for underserved borrowers, as a direct result of banks and credit unions withdrawing from those origination markets.
Mortgage experts and trade associations, including the MBA, the Community Home Lenders of America (CHLA), and former president of Ginnie Mae, Ted Tozer, recognize the risk that mortgage servicers, like Rocket Mortgage, PennyMac, and Mr. Cooper Group, face when holding a disproportional amount of FHA, VA, and USDA-guaranteed home loans on their books.
Because independent mortgage banks (IMBs) do not carry large, liquid balance sheets to hold non-performing loans for an extended period, buyouts are capital intensive and can create liquidity stress. The EBO security provides a new source of liquidity to help IMBs and other issuers better manage the liquidity challenges of participating in Ginnie Mae programs.
“MBA’s proposed Ginnie Mae Early-Buyout (EBO) securitization would expand liquidity for government servicing through all economic cycles,” said MBA President and CEO Bob Broeksmit, CMB. “An EBO security addresses the timing mismatch within Ginnie Mae’s program, helping to alleviate an ongoing issue that has concerned issuers and regulators alike."
Liquidity concerns and regulatory anxiety over “inherent timing mismatch in principal and interest payment advances” within the Ginnie Mae program. Released today, the MBA's white paper explaining the new product, Ginnie Mae EBO Securitization, outlines the benefits of the Early-Buyout (EBO) security to issuers, investors, warehouse lenders, and consumers.
"It also has the potential to increase the value of Ginnie Mae servicing, which could translate into lower costs for FHA, VA, and USDA borrowers,” Broeksmit added.
Refinances Saved Servicers
Initially, no one expected that banks and credit unions would, for the most part, leave FHA, VA, and other government-backed lending behind post-2008, leaving nonbank lenders to fill the home loan vacuum.
“During the Great Depression, we developed so many backstops for the banking industry,” Tozer told NMP. "You look at the banking sector, they have FDIC insurance; they have the Fed discount window; they can borrow from the Federal Bank system... We have no backstops at all for the independent mortgage bankers.”
IMBs have to keep making payments on their mortgage backed security (MBS) obligations, even if payments have stopped coming from the borrower. This can force IMBs to advance substantial payments to investors, either by borrowing the money or using whatever cash resources they have internally.
Tozer warns: “If we have another situation, like COVID, where we see a prolonged forbearance process, then we need something that enables independent mortgage bankers to get injections of liquidity. If [IMBs] continue to make those payments on the MBS without any underlying mortgage payments coming in for the borrowers, they could possibly go bankrupt.”
Tozer explains that during the pandemic, the industry had substantial EBO activity where people were buying their delinquent loans out of their normal pools, so they didn't have to make these payments on their MBS obligations.
“All the major mortgage companies — like PennyMac, Mr. Cooper Group, Freedom — had a substantial amount of buyouts or EBOs during the pandemic,” he said. The cash the nonbank lenders accrued through the 2020 and 2021 refinance boom enabled them to buyout loans rather than issue them with a government guarantee. “During the pandemic, [IMBs] were borrowing the money through this one month lag time that Ginnie Mae had in their process as far as when you had to remit payoffs, so they didn't ever have to borrow the money.”
But Tozer theorizes that lenders won't see the same refinance surge to finance all these EBOs in a future downturn. Therefore, a stable funding source must be in place to stop the IMBs from having to make all the payments on MBS obligations when there's not enough cash being generated from borrowers’ payments to pay MBS investors.
Modernization Proposals
Under MBA’s proposal, an EBO securitization would consist of non-performing Federal Housing Administration (FHA), Veterans Affairs (VA), and USDA loans bought out of traditional Ginnie Mae pools. Buying loans out of the pool stops the issuer’s obligation of continuing to make principal and interest payments to investors during a time they are not receiving payments from borrowers.
The EBO security would allow the issuer to sell pools of EBOs to private investors who would receive an accrual of the scheduled principal and interest payments when the loans resolve either through the borrower reperforming on the loan, or when the loan is foreclosed and goes to claim with FHA, VA, or the Rural Housing Service. Those agencies’ primary guarantee would repay the investors the principal and total amount of missed payments.
“An EBO securitization would expand liquidity for IMBs, who account for more than 85% of Ginnie Mae issuance, ensuring they have the ability to lend to first-time and low- and moderate-income homebuyers through all economic cycles,” said Broeksmit. “Importantly, Ginnie Mae can implement this under its existing program authority and has the necessary funding and staff resources to do so.”
Tozer, however, has gotten to know what investors in the secondary market have an appetite for from his 30-year career in the industry, including his time as Ginnie Mae’s president. He believes it will be more difficult and riskier trying to attract investors to a new product, versus issuing commercial paper guaranteed by Ginnie Mae.
“To start a brand new security is tough because people want liquidity,” Tozer says. “If you're a bond investor, you wanna make sure that there's plenty of bonds out there so that you can buy and sell very easily. Well, unless you've got somebody like the Federal Reserve to buy these first bonds that are issued… you could have a pretty prohibitive interest rate on borrowing. So in order to get that liquidity, lenders will have to pay a really steep price.”
In Tozer's initial proposal filed in October 2023, IMBs could fund the closing of government loans using commercial paper guaranteed by Ginnie Mae. Today, an IMB uses its unsold closed mortgages as collateral to support credit lines for its warehouse. Instead, an IMB could issue commercial paper guaranteed by Ginnie Mae to fund its warehouse of closed loans.
“My feeling is, let's create commercial paper that can run anywhere from three months to nine months, maybe as much as a year maturity," Tozer says. "Lenders will get plenty of time to work through these EBO activities. And commercial paper is a well established security — I mean, it's a multi-trillion dollar market out there.”
Notably, Tozer adds that this new funding source would potentially cut the cost of originating government loans. Some commercial banks have said they could reduce the interest they would charge to fund an IMB warehouse to approximately the one-year Treasury bill yield.
Tozer proposes commercial paper would “trade almost like Treasury Bills,” he said. “So in today’s world, you would be paying 3% to 3.5% for this commercial paper, who knows what this EBO would trade at.”
As regulators and the association prepare for doomsday, Tozer assures that he sees no signs of an impending recession. But, he cautions that waiting any longer would mean it's already too late.
“Right now, I mean, the industry is really strong," he said. "But it may take a year or longer to get any of these proposals in place. So let's start talking about it now, when everybody's in a good situation, frequencies are down, independent mortgage bankers have plenty of cash. Let's do it now, so that in a year or two we can avoid a recession."
