The leaders of the FHA, VA, USDA and Ginnie Mae who spoke on the government lending update panel at the MBA Secondary Conference on Tuesday are well aware that lenders and investors find working with their agencies discouragingly hard. Their session reflected the work they’re doing to change that experience, and outlined important policy revisions.
MBA Chairman and CEO of CMG Financial Chris George moderated the panel, which included Maren Kasper, acting president of Ginnie Mae, John Bell, deputy director at VA, Gisele Roget, deputy assistant secretary of FHA, and Joaquin Tremois, director of single-family housing at USDA.
Perhaps the most high-profile issue for the panel was the churn of VA loans and how Ginnie Mae is handling that. Kasper said the agency was using two general principles to guide their policies: protecting the veteran benefit and making sure there are making prudent, data-driven solutions.
“A year ago, we were looking at specific issuers that were outliers, going after the idiosyncratic nature of the problem. That worked, but then we had a period of time where rates were rising, and we’re also still seeing elevated prepayment speeds,” Kasper said. “When we see prepayment speeds are elevated, it’s a sign of refis occurring in a rising rate environment.”
Those elevated prepayment speeds create uncertainty around Ginnie Mae bonds, causing investors to pay less for the next pool. The ultimate result is that borrowers get higher rates and pay more for their mortgage, Kasper said.
Ginnie Mae found that higher LTV cash-out refis were causing this uncertainty, even though they weren’t a large part of the pools. To combat this, Ginnie Mae has proposed putting those on a separate security.
“Ginnie Mae will always guarantee that product...We are taking this seriously and doing this right,” Kasper said.
Another hot-button issue was raised by the only audience member who asked a question: What were the panelists’ opinions on DACA loans?
In their answers, the panelists echoed the Trump administration’s position that they are following policies that have been on the books for years.
Tremois said USDA runs immigrant applicants through a Homeland Security database to see if they are qualified under USDA rules. The VA uses the same database.
The FHA’s Roget referred to the FHA Single-Family Handbook, and noted that the long-standing policy required immigrants to be “lawfully present” in the U.S. to be eligible for an FHA-backed loan. She further commented that the handbook also requires that “a lender can reasonably project that a borrower will maintain employment for three years.”
The panelists also discussed recent and upcoming policy changes and how they are leveraging technology to make their systems and processes better.
Ginnie Mae is looking at how it could develop stress tests for non-bank issuers as part of its counter-party risk framework.
“This is a really difficult policy implementation. If we stress all the nonbanks in the program, what would that even look like? What we want to do is start to get input,” Kasper said. “No two issuers in the program are the same.”
Ginnie Mae has held 30 hours of meetings with nonbanks to get their input and wants the industry to look at models it’s proposing and give feedback. A second round of comments will be open this summer.
“With the issuers in our program we function on two ends: We have a business relationship with you and sometimes we have to act akin to a regulator, because of the taxpayer dollars at risk. We want to balance those two spectrums, and work more collaboratively,” Kasper said.
The FHA recently proposed certification changes and defect taxonomy changes to make it easier for lenders to do business with them. Among the biggest changes were a consolidation of the certification around borrowers and eliminating the “legalese” throughout.
“Our overall rationale behind the changes was, let’s bring some added clarity and transparency for compliance,” Roget said. “We understand that regulatory certainty is what all our lenders need. For lenders who stayed in FHA, and for those who moved away, they need to know — what are the rules of the road?”
In particular, the FHA is concerned that because a whole class of financial institutions — depository banks — aren’t participating in FHA programs, that may be contributing to an overall decline in lending to minority communities.
The USDA continues to face marketplace challenges due to the small balance loans most rural areas need, Tremois said. He hinted at a change coming soon, possibly a change to the interest rate cap.
The VA is grappling with the amount of churning it is seeing, and are in the midst of developing its second rule by the end of the year. While acutely aware of the churning problem, the VA wants to make sure any strategy is based on actual data, Bell said.
“There are a lot of things in play from VA’s point of view,” Bell said. “We want to make sure we’re taking care of the few lenders [doing business with us]. Out of those we want to make sure we’re not throwing out a program based on the data that we’re not seeing,” Bell said.
“People talk about high LTV lending, but we haven’t seen that that alone causes default. We do see high LTV plus other things, light low residual and high debt. What we’re trying to do is formulate what that means to us.”
The VA is hiring a five-person regulation team and a contractor to work on priority regulations and enforcements over the next six to nine months.
In a world where lenders and investors need certainty and transparency, most of the government agencies are still operating with ancient technology.
For Ginnie Mae especially, the need to understand what’s in specific portfolios is critical to its mission to attract investors from all over the world. The agency sits on a mountain of data and has upgraded its tech to boost its analytical capability, Kasper said. As part of its strategic 2020 plan, Ginnie Mae is planning in the near term for single-sign-on capabilities and will have a pilot by the end of the year to accept digital mortgages.
For the FHA, the recent $20 million approved by Congress to upgrade FHA technology with a specific suite of product enhancements was the result of a years-long effort to educate law makers on what the agency needs and give Congress a roadmap with specific solutions.
Although that tech roadmap requires an additional $60 million from Congress, the FHA thinks that even the first set of upgrades will be felt by lenders. Of first priority — getting certainty internally and for lenders that FHA loans are meeting standards.
“We’re using mainframes — systems that have existed longer than some of us have been alive,” Roget said. “We’ve got to get away from paper binders — there are millions of dollars spent on record management every year.”
For USDA, the big news is the $25-per-loan technology fee that the agency has been authorized to charge beginning in October. The agency is also centralizing its 47 state offices into one organization reporting up to D.C. In addition to cost savings, the agency expects the centralization will also improve consistency in decision making, so lenders don’t get different answers from offices in different locations.
The VA is utilizing its data to create scorecards so that it can show lenders how they are performing versus their counterparts from a price perspective.