WASHINGTON — Ginnie Mae needs to increase its current staffing level and in-house expertise to deal with the risks posed by a growing number of nonbank seller/servicers, according to the inspector general for the Department of Housing and Urban Development.
Ginnie has a $1.65 trillion mortgage-backed securities portfolio, which is expected to top $2 trillion in 2017.
"It is imperative to the country's larger financial health that Ginnie Mae be able to increase staffing with the needed skills, knowledge and abilities to manage a $1.6 trillion program," HUD Inspector General David Montoya told lawmakers at a hearing last week.
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New servicing standards issued by the government-sponsored enterprises are unlikely to pose a hurdle for the biggest nonbank players in the market, but small servicers could find it more challenging.
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Independent mortgage lenders are expecting a wave of consolidation prompted by excessive compliance costs, a tepid housing recovery and the need for more capital to grow their businesses. Roughly 20% to 25% of independent companies could be eliminated or change hands in less than two years.
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Ginnie currently has 130 full-time employees. It relies mostly on third-party contractors to perform key operating functions.
"Ginnie Mae could benefit from an estimated 30 positions with a higher salary level than what the general schedule allows in order to attract the needed and specialized skill sets to operate in the U.S. financial market," Montoya said.
None of the current employees, including Ginnie Mae President Ted Tozer, receive what is known as "premium pay" in the civil service.
Banks have been exiting the servicing business over the past few years because of higher capital requirements on mortgage servicing rights and other issues.
As a result, Ginnie cannot rely on the Office of the Comptroller of the Currency or the Federal Deposit Insurance to monitor the financial condition of a substantial number of Ginnie Mae's MBS issuers and servicers.
"To mitigate the risks, Ginnie Mae will need to be more involved with nonbanks to adequately monitor them, which would require Ginnie to increase its current staffing level expertise," Montoya said.
Others are also questioning Ginnie's strategy.
Ginnie is "trying to go heavy on monitoring, which we think is a very good idea. However, monitoring has its limitations," said Karan Kaul, a research associate at the Urban Institute Housing Finance Policy Center.
Mortgage servicing rates are highly interest rate sensitive and values are difficult to hedge. Over the past few quarters, servicers had to mark down their servicing rights because some expected interest rates to spike. But that hasn't happened yet.
"No one can predict an interest rate shock, including Ginnie Mae," Kaul said. "You cannot rely on monitoring alone; there has to be a stronger capital regime."
Ginnie currently requires its servicers to maintain a minimum net worth of 6% of total assets.
In a recent Urban Institute paper, "Nonbank Servicer Regulation," Kaul and Housing Finance Policy Center director Laurie Goodman called for Ginnie to raise its capital requirements or move to a risk-based capital system.
"If you are going to hold MSRs, fine, but you've got to hold more capital against it just like in the banking sector," Kaul said.
The HUD's inspector general is also urging the Federal Housing Administration to do more random sampling of loans to determine if new loans are viable or not.
"They are doing a better job of that. Certainly not as fast as we would like to see it," Montoya told lawmakers.
He also told the subcommittee members that HUD "doesn't do a good job in reviewing" lender claims on defaulted loans and making sure they aren't paying lenders too much. "That is another area that impacts the [FHA] fund," Montoya said.
