Why Ginnie Plans to Stress-Test Mortgage Lenders

Ginnie Mae spotted the red flags at W.J. Bradley soon enough to have a new loan servicer in place by the time the nonbank mortgage lender failed in March.

There were no interruptions in cash flow from the pools of loans Bradley had originated to the investors in the bonds Ginnie guaranteed. The agency had done had its job.

But Ginnie wants go one step further in its monitoring of issuers' operations. It plans to model how the liquidity of companies that issue its mortgage-backed securities would look under stress, so it can troubleshoot more effectively.

"With rate changes and delinquency changes changing the whole complexion of an issuer, just getting the snapshot of their financials periodically isn't enough," said Ted Tozer, Ginnie's president. "We need to be more dynamic to understand how close they are to the tipping point. Then we could actually see some of them deteriorating to the point where things are going to happen. That would give us time to remediate. That gives us time to counsel."

Ginnie has a ways to go before it can figure out exactly how to implement and budget for stress tests, but it has begun considering how it might conduct them.

"We'll come out with a process to stress-test your corporation and give us the feedback or somehow do a stress test ourselves," Tozer said.

Ginnie's bank issuers, its traditional customer base, are already subject to stress tests under the post-crisis regulatory regime. But nonbanks are not. While Ginnie is smaller than its secondary market cousins Fannie Mae and Freddie Mac, nonbank servicers account for a greater percentage of Ginnie's mortgage risk.

Another reason stress tests would be helpful to Ginnie in managing the nonbanks, a group it has less experience managing, is that some of the more active MBS issuers in this category have unseasoned portfolios.

These issuers haven't been through the peak loss period for loans or an economic cycle, so they may not have accounted for stress, said Michael Drayne, a senior vice president at Ginnie.

"In the future, I think we need to have more dialogue [with newer nonbank issuers] beyond the net worth threshold," Drayne said at the Mortgage Bankers Association's national secondary market conference last week.

Even the banks' stress tests have their limits and don't necessarily examine the liquidity risk specific to Ginnie, so the agency, a part of the Department of Housing and Urban Development, will stress test them as well.

"We're going to have a regimen that all issuers will go through whether they are banks or nonbanks," Tozer said.

This compounds Ginnie's challenge in managing a growing number of issuers. Ginnie has 460 issuers to monitor but only 11 account executives, Tozer said.

The growth has been a mixed blessing. More issuers means more diversification, but it also has expanded the scope and importance of Ginnie's supervisory responsibilities, straining its limited resources.

Mortgage bankers have been working to help Ginnie address the resource management concern and they are open to the idea of stress tests, said David Stevens, the MBA's president and CEO.

"MBA believes it's appropriate for them [Ginnie] to have sound risk management tools in place," Stevens said in an email.

While the stress tests may not be imminent, Tozer urged issuers to examine, as soon as possible, how their available supply of ready cash to make timely advances to bondholders might stand up to a shock.

Liquidity has been a big concern among failed issuers during his six years at the agency's helm, Tozer said.

"Every issuer that has failed has failed because they ran out of cash," he said.