It is rare to see a regulator so afraid of its own programs as we are witnessing at Ginnie Mae. In an alarming move, Ginnie Mae has unleashed a plan that, if implemented, will significantly alter the mortgage markets and raise costs on loans that the majority of first-time homebuyers and minority homebuyers depend on.
On July 9, a Friday afternoon when most were ending their week, Ginnie Mae snuck out a request for information on a rule that would require a 250% risk weighting on Ginnie Mae mortgage servicing rights. The rule would also require additional capital be held by any approved issuer for non-Ginnie Mae loans including GSE mortgages as well as loans held for sale. The request for information (RFI) came with the added insult of an only 30-day comment period and clear language stating that this was not a notice and comment rule-making but simply a desire to get feedback.
There are several concerns about the path Ginnie Mae is on. First, it defies testimony and statements from HUD Secretary Marcia Fudge on trying to expand access to homeownership for minorities. Frankly, it raises the question whether the Secretary or her senior staff had even seen this RFI and policy plan at all. With no Ginnie Mae president, a seat that has been vacant going back into the Trump Administration, some are concerned that this is the product of GNMA staff run amuck.
The RFI states some general priorities but in reviewing the recommended policy it is striking that there is no logic, no methodology, no data at all to reference what would justify why they are moving in this manner.
Perhaps the best glimmer of logic, or lack thereof, comes from a friend. Cliff Rossi, a professor at the University of Maryland and a former co-worker, defended the Ginnie Mae policy plan in this opinion piece published by Housing Wire. Honestly, despite my deep respect for Rossi, I find his arguments in favor of this plan to be derogatory to the entire independent mortgage banker business model but also just simply flawed.
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To highlight a few points, let me start with his reference to Countrywide Mortgage, which dramatically failed in the heat of the 2008 Great Recession. Rossi contends that they failed due to a liquidity crisis. In fact, Countrywide failed because they were the leading lemming that led all the others as they all chased Countrywide off the cliff amidst the housing bubble.
Countrywide led the market in adverse selection and poor lending practices. From subprime, to deeply discounted pay option arms, from no doc lending, the “Fast and Easy” loan, interest only loans, and more, Countrywide failed from originating terrible credit quality loans that could not sustain when the market failed. To base their collapse on a liquidity crisis is absurd. In fact, you can assume that had Dodd-Frank been in place, Countrywide would have had a small fraction of the products that they had back then and the housing crisis would not have happened.
Today, the nonbank lending industry, in fact all lenders, originate loans using an ability to repay standard (ATR). There is simply no comparison. But if the 2008 crash is the basis as to what Ginnie Mae is setting capital levels at, then perhaps we should simply shut the program down altogether.
Rossi goes on then to look at PMI companies and the PMIERs capital standard put in place as justification for doing the same to Ginnie Mae issuers and servicers. But, let’s be clear. PMI is the first loss in the default stack for a GSE loan. They cover a significant amount of total expected loss on a GSE loan and therefore it is responsible to make sure they will be there in the next downturn.
Similarly, for an FHA lender, FHA takes first and total loss. They are the insurance company. So, yes, FHA should be capitalized and in fact there is a statutory measure that is there to insure that. Comparing PMI to the FHA program might make sense, but comparing it to an originator is…non-sensical.
Rossi also took a back-of-the-napkin approach to state that, by his own research, nonbank-originated loans had a 1.9 times greater chance of default than by banks. The fact is, nonbanks do provide broader credit terms in the FHA loan program than banks. Rossi states so himself simply by acknowledging that banks left the FHA program after the Great Recession. Even today, banks continue to have far tighter underwriting overlays on the program. Rossi states that they left due to servicing (MSR) volatility. The fact is they left due to False Claims Act enforcement fears. The servicing of FHA loans was associated but secondary.
Look, I could go on poking fun at Rossi’s supposed analysis, but let’s be clear. Ginnie Mae servicing is a massive $2 trillion portfolio held by investors globally. A 250% risk weighting applied to Ginnie Mae MSRs would instantly devalue the entire existing global balance sheet. The demand for committed capital would be extraordinary and the liquidity of this servicing would dry up.
To be clear, for a regulator trying to protect against large market disruptions, this single policy would actually be that market disrupter that they apparently want to avoid.
But let’s all agree that there is risk in servicing the Ginnie Mae mortgages. If a default occurs, scheduled payments must be made to investors regardless as to whether the borrower is paying the mortgage. This means a servicer must have dependable and reliable access to credit and repo lines in order to manage that asset. But advances are not unlimited. In fact, a servicer can pull a loan out of a pool after 90 days or, as some do, the servicer can file for a partial claim and get reimbursed for some of the advances along the way.
But what’s most alarming here is the lack of transparency. To sneak this out on a Friday afternoon with no detail, modeling, metrics, or other data is confounding. And if the Great Recession was used as the basis for this capital standard, then why did we go through the effort of passing Dodd Frank and wiping out the variety of products that took down Countrywide and so many others? Neg am, SISA, NINA, extended term loans, interest only, balloon loans, short-term ARMS, and more were outlawed by statute. The CFPB now manages the ability to repay standard which requires lenders to prove the borrower can repay the mortgage.
This policy, if implemented, would be a dagger in the back of the FHA, VA and USDA programs. It would be an embarrassment to the HUD Secretary’s efforts to advance homeownership opportunities. Ginnie Mae has published a rule that seems to be looking back at the Great Recession or even the Great Depression, but it does not take into account all of the protections put in place after 2010 when Dodd Frank was passed.
And despite a rational argument that insuring adequate capital is needed, this simply goes too far without the logic or rationale to support it. This is a bad policy proposal.
David Stevens is the former CEO of the Mortgage Bankers Association as well as a former FHA Commissioner at HUD. He is currently CEO of Mountain Lake Consulting, Inc.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Dave Stevens at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]