Calls for Ginnie Mae modernization mount after FSOC report

One key question emerging following a recent Financial Stability Oversight Council report on nonbank mortgage risks is whether it will lead to the new authorities for Ginnie Mae in line with its recommendations.

A growing number of reactions to the report, which also advocates for other measures like expanded powers for the entity that regulates government-sponsored enterprises Fannie Mae and Freddie Mac, are centering on Ginnie's role in the market 

"The most significant advance responsibilities that servicers have are in the Ginnie Mae program. They're much higher than Fannie and Freddie's," said Scott Olson, executive director the Community Home Lenders of America.

The CHLA, which was in the midst of elaborating on what's been a broad call for greater financial and hiring resources at Ginnie when the council's report came out, considers the issue a particularly prominent one within the council's study, Olson said.

"FSOC is this broad agency, they're not going to focus on just this one thing, but we think they should," he said.

Other commentators like independent analyst Chris Whalen also spotlighted Ginnie as a risk-management priority because servicers' responsibility for advancing payments to mortgage securitization investors when borrowers aren't paying is greatest in that market.

"The liquidity problem discussed in the FSOC report is specific to Ginnie Mae servicing assets," said Whalen in his Institutional Risk Analyst blog. (Whalen also is a regular columnist for this publication.) 

The issue is one Ginnie has long had its eye on, Sam Valverde, acting president of the government mortgage securitization guarantor, recently reminded FSOC.

"We have been raising this source of concern for over a decade," he said. "We have spent just as long deploying our existing authorities to develop a suite of risk management and oversight tools to manage these risks, but we need new authorities," he added.

Ginnie's budget and salary authorizations should be increased in line with current costs and so they're competitive with those of other agencies, Olson said, calling for an increase in its current $54 million in funding to $67 million for fiscal year 2025.

The agency could use the additional funding to oversee issuers, put issuer financing pacts in place more quickly and transfer servicing if needed, the CHLA said.

It also could expand and make permanent the temporary liquidity program available during the pandemic as recommended by the FSOC report and previously by Ginnie itself. 

That Pass-Through Assistance Program facility was only lightly used during the pandemic due to its last-resort nature and the Federal Reserve's decision to lower interest rates as a form of relief. Rate-driven refinancing returned cash to mortgage companies to cover advances.

However, there is concern that heavy advancing responsibilities could re-emerge in a market environment where this source of cash would not be available to the industry, particularly given that many borrowers have now recently refinanced at record-low rates.

While some in the industry back suggestions in the FSOC report for an expanded PTAP or a former Ginnie chief's proposal for a guaranteed commercial paper facility, they've been less enthusiastic about another recommendation in the study for an industry-funded resource.

While the idea of expanding Ginnie's authorities is gaining momentum in the wake of the FSOC report, it ultimately depends on Congressional intervention that might not be forthcoming.

The Ginnie liquidity problem "cannot be fixed without legislation," Whalen noted.

Stock analysts at Keefe, Bruyette & Woods issued a research note on Thursday skeptical of such intervention.

"We believe that congressional action to increase regulation is very unlikely, especially because the larger nonbank servicers appear well capitalized," said Bose George and Alexander Bond, analysts at KBW, in a report.

Ginnie has issued a nonbank, risk-based capital rule for mortgage servicing rights set to go into effect at the tail end of this year.

The rule received some pushback from mortgage firms early on, with some indicating it could discourage the holding of MSRs and push companies toward subservicing. Others have called it manageable.

Ginnie has pledged to work with companies that foresee challenges on implementation.