Washington is the problem of mortgage financing

Washington is the problem of mortgage financing

It’s August and that means stupid and inexplicable things can happen in Washington, DC Around this time last year, the mortgage finance industry got the proverbial two-by-four in its face just as many were trying to leave for vacation. We sounded the first warning Institutional Risk Analyst a year ago:

“Our friends at Ginnie Mae suddenly issued a request for public comment on a strange proposal for new eligibility standards for issuers that would crush many government lenders. The announcement came late Friday, which means Ginnie Mae buried the request on the website. In fact. , we’re hearing that Ginnie Mae originally planned to publish the rule without any request for public comment.”

A lot has happened in a year. The Senate has confirmed Sandra Thompson, a veteran of the Federal Deposit Insurance Corp and Resolution Trust, as director of the Federal Housing Finance Agency. The Senate also established a new president of Ginnie Mae, Alana McCargoan industry veteran who worked in outside roles for the GSEs, JPMorganChase and most recently the Urban Institute.

These two appointments are very good news for the industry after years of neglect by the White House and Congress. The big hope is that these two agencies can move forward together, in concert with the states, to conclude the two issuer eligibility rules that have been pending in the industry for years without completion. But are Thompson and McCargo sensitive enough to the increasingly dire plight of the mortgage industry?

We noted earlier that Thompson and FHFA essentially approximated the two issuer eligibility proposals by including different capital risk weights for conventional and government-insured assets in FHFA’s capital proposal. But Thompson can’t act unilaterally on new standards for non-bank issuers in Fannie Mae and Freddie Mac’s mainstream market.

If Ginnie Mae and the FHFA disagree on the requirements for government-backed assets (loans and services), then the industry faces chaos. A significant divergence between the FHFA and the Ginnie Mae issuer rules could greatly disrupt the secondary market, and that is precisely the outcome now facing the mortgage industry.

Ratings of Ginnie Mae securities, government-insured loans and mortgage servicing rights (MSRs) could be adversely affected, along with the credit ratings of Moody’s, Kroll Bond Ratings and other agencies. The threat of reduced operating leverage and thus profitability could also weigh on equity market prices for mortgage issuers at a time when many companies are on the brink of insolvency.

The process is complicated by the fact that the two secondary markets are very different. In the conventional market, the GSEs own the loans and allow private issuers to retain the servicing asset. The GSEs issue the mortgage-backed securities and reimburse private issuers for the expenses incurred in servicing bad loans. The main risk for conventional issuers is short-term liquidity and, more seriously, loan repurchase claims by the GSEs due to a manufacturing defect.

In the government market, on the other hand, the seller/servicer owns the government-insured and servicer loans, and they issue the MBS with a Ginnie Mae guarantee to the bondholders. Ginnie Mae cannot reimburse issuers for fees and therefore provide liquidity to the market. Instead, government issuers must fund Ginnie Mae’s loss mitigation indefinitely until the loan is modified or foreclosed.

Ginnie Mae just made modest changes to the issuer eligibility rules on August 4, 2022, but broadcasters worry that more significant changes are on the horizon. Word on the street is that FHFA and Ginnie Mae could release their final eligibility proposals for issuers over Labor Day weekend, hoping to align capital and liquidity. But there may be more bad news for the industry.

The industry’s big hope is a more liberal approach to counting unused credit lines from banks as part of liquidity calculations. The big concern is that both Ginnie Mae and FHFA may require higher margin requirements for securities-to-be-advertised (TBA) trades in the secondary loan market. We discussed the FHFA’s proposal on TBA margins in March in this column.

Note that the SEC and FINRA have the primary statutory responsibility of Congress for setting margin requirements. The last thing the mortgage finance industry needs is increased hedging costs, especially when secondary market volatility has already tripled compared to historical market movements. Notably, the FHFA has declined to confirm to NMN whether they have discussed their proposal with FINRA or the SEC

Rising margin costs are just one of many threats to the industry in the third quarter of 2022. The big risk comes from rising delinquency levels, a threat that is almost in everyone’s face but still is not visible in the data. Operators, however, know that a large amount of government loans are headed for default after COVID. Thompson and McCargo should actively support loss mitigation with additional liquidity for Ginnie Mae issuers.

On Capitol Hill, members of Congress are preoccupied with matters of no consequence, such as the non-existent risk of the GSEs while they sit in guardianship. No less a financial authority than Rep. French Hill (R-AR) and nine other Republican committee members recently sent a letter to FHFA Director Thompson calling for oversight of the activities of Fannie Mae and Freddie Mac.

Rather than making much ado about the perceived risk of the GSEs, Republican members should encourage the FHFA to support liquidity for private mortgage originators as the U.S. economy enters recession Maybe Rep. Hill and his esteemed colleagues didn’t get the memo, but the GSEs are essentially stuck in conservation indefinitely and are liquidating their balance sheets.

Apparently, the French MP does not understand that without legislation, the GSEs will never come out of guardianship. In fact, once the GSEs pay off the rest of their corporate debt, Fannie Mae and Freddie Mac will be neutralized, mere mortgage conduits without a loan book and an insurance book backed by Uncle Sam.

As the GSEs exit the world of buying portfolio-stage loans, the mortgage industry is in dire need of a new source of liquidity. Commercial banks are already withdrawing from the mortgage market at the behest of prudential regulators. In addition to securing issuer eligibility proposals, Thompson must help President McCargo focus on obtaining sufficient liquidity to help Ginnie Mae issuers fund loss mitigation activities in a real recession.

In 2020, there were fears of liquidity shortfalls due to COVID tolerance that never materialized. Now we have a Fed-induced recession looming, with delinquency rising in plain sight of lenders, and not enough fear and loathing from the FHFA and Ginnie Mae. There’s a reason federal bank regulators are pressuring major banks to raise capital and sell, yes sell, risky assets like 1-4 family mortgages. We talked about the bank’s flawed stress tests the Fed in our last comment.

FHFA’s immediate steps to strengthen the liquidity of Ginnie Mae issuers should include reopening the Federal Home Loan Banks to bona fide insurance subsidiaries of independent mortgage banks. And both Thompson and McCargo need to raise the liquidity problem for government loans and Ginnie in asset servicing with the Treasury, the Federal Reserve Board, and the White House now, before we have a liquidity problem in the end this year or 2023.


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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!