Non-Bank Issuer Growth Strains Ginnie Resources

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A watchdog report indicates that the Government National Mortgage Association’s resources are being strained by the increase in non-bank issuers.

Ginnie Mae previously reported $472 billion in issuance of mortgage-backed securities that were secured by residential loans in fiscal-year 2016.

During that same year, non-bank entities were responsible for 73 percent of the Washington-based organization’s single-family MBS issuance.

Non-bank share of single-family issuance has widened significantly since fiscal-year 2010, when it was just 18 percent.

Those details were discussed in Monitoring of Nonbank Issuers Presents Challenges for Ginnie Mae from the Office of Inspector General Department of Housing and Urban Development.

At the same time, the concentration among the top-five issuers has diminished significantly, with the group’s share falling to 35 percent in fiscal-year 2016 from 76 percent in fiscal-year 2010.

As a result of the shift, Ginnie’s staff workload has soared as its reliance on bank regulators oversight has been reduced.

The report indicated that Ginnie finished its fiscal-year 2016 with guaranties made on loans with an unpaid principal balance of around $1.73 trillion — up 62 percent from 2010. More recently, Ginnie reported its book of business was $1.80 trillion as of Feb. 28, 2017.

Single-family loans insured by the Federal Housing Administration accounted for 57.6 percent of Ginnie’s book as of Sept. 30, 2016, while loans guaranteed by the Department of Veterans Affairs made up 27.8 percent, and mortgages insured by the Department of Agriculture and HUD’s Office of Public and Indian Housing represented 5.9 percent. Non-single-family loans accounted for the remaining 8.7 percent.

The government-owned corporation acknowledged risks from the shift to non-bank issuers in a 2014 report, An Era of Transformation. Ginnie created a five-point strategic plan to address the shift.

The OIG noted
that Ginnie’s outgoing president, Ted Tozer, indicated in January 2017 that the company needs to continue to evolve to understand its non-bank risks and proactively address them.

In an interview that same month with Mortgage Daily, Tozer said dealing with counterparty risk management was among his greatest challenges as the company transitioned from having five big banks doing 80 percent of the business to 85 issuers now handling 85 percent of the business.

“That’s been the biggest challenge in trying to convince Congress and the administration to fund us, to have the proper funding to handle that counterparty risk that we have to deal with today,” he said.

The report said the change in the number of issuers isn’t the only problem.

“Not only is the Ginnie Mae portfolio made up of more issuers, many new issuers tend to have more complex financial and operational structures,” the report stated. “Whereas bank issuers tended to operate all business functions internally, non-banks are likely to rely on external credit lines and more frequent trading of servicing rights, including the use of sub-servicers.”

One issue with sub-servicers is that while they reduce risk for a single-issuer failure, they handle servicing for multiple issuers.

The OIG highlighted the Taylor Bean & Whitaker debacle, which left Ginnie managing a $26 billion servicing portfolio. The third-party subservicer engaged by Ginnie had difficulty servicing the loans.

As of year-end 2016, Ginnie had eight non-bank servicers with portfolios as large as Taylor Bean’s — with two carrying portfolios in excess of $100 billion. The report indicated that the largest non-bank issuers grew more than four times as fast as Ginnie as a whole last year.

An audit completed in November left the OIG unable to opine on Ginnie’s financial statements due to significant issues that couldn’t be resolved.

Four material weaknesses identified in the audit were deficiencies in internal controls that created a reasonable possibility Ginnie would not prevent, detect or correct a material misstatement on its financial statements in a timely basis. Most of the issues were the result of Taylor Bean loan servicing.

“During preliminary work, OIG found that Ginnie Mae’s organizational structure and staff levels have not kept pace with the growth and changes in the mortgage industry,” the report stated. “OIG believes this poses a greater risk to Ginnie Mae’s ability to properly monitor and mitigate the risks posed by non-banks than whether its compliance reviews ensure nonbank issuers service loans in accordance with its rules and requirements.”

Mortgage Expert

Mortgage Daily Staff

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