The Government National Mortgage Association is increasingly doing business with non-bank servicers, presenting a new set of challenges.
Based on Ginnie Mae’s issuance volume, non-depository share has gone from 13 percent in 2011 to 44 percent as of June 2014.
From the perspective of the outstanding portfolio, non-bank share has risen from 9 percent to a quarter during the same period.
The Washington-based company discussed the shift in An Era of Transformation.
The report was prompted by the need for Ginnie to assess how it should deal with the significant increase in non-depository issuers — which was not contemplated by Ginnie when its MBS program was established.
A table in the report showed Ginnie’s top 10 issuers were responsible for 87 percent of its $1.084 trillion portfolio as of June 2011. But just one — PHH Mortgage Corp. — was not affiliated with a financial institution.
By June 2014, however — when top-10 issuers were collectively responsible for just 63 percent of Ginnie’s $1.367 trillion portfolio — six were non-bank.
Some of the non-bank servicers don’t aspire to be full-scale mortgage bankers and are structured to link funds of capital with operating platforms for the primary — or even exclusive — purpose of overseeing MSR investments.
Behind the migration from banks to non-banks is Basel III and banks’ inability to deal with a surge in defaults. But even more of a driving force is the incurrence of enormous retroactive costs in the form of settlements and penalties.
“The possibility of continuing unpredictable government-driven costs from a variety of sources will constrain the appetite for participation on the part of the banks that have borne the brunt of them to this point, facilitating the rise of inevitable costs to the consumer,” the report said.
Another factor is the abundant availability of capital for non-banks.
However, as banks have modified their business approaches, some non-bank servicers have become concerned about vulnerabilities — driving them to the capital markets. Participating in the Ginnie Mae MBS program is one way to access such markets. This non-bank migration to Ginnie is expected to continue for several years.
But the speed of the transition has made government entities concerned.
Also, Ginnie still has a bad taste in its mouth from the demise of one big non-bank player.
“The long aftermath of the 2009 failure of Taylor, Bean & Whitaker (which resulted in the confiscation of a $25 billion government MSR portfolio by Ginnie Mae) has demonstrated the inherent difficulties of making a small government agency designed to administer a security guaranty program also an asset manager, particularly when the need to enter into and perform asset management functions is almost completely unpredictable in terms of timing and scale,” the report said.
But Ginnie’s MBS program doesn’t distinguish between bank and non-bank issuers.
“The retreat of commercial banks from mortgage lending and servicing, and the replacement of this capacity by non-depository institutions with more complex financial and operational structures, represents a significantly different operating environment than that for which the program was originally designed,” the report stated.
When banks were dominant among its issuers, Ginnie could rely on bank regulators for its risk management. But with the increase in non-bank issuers, it will be required to make substantial changes to its counterparty monitoring and governing practices.
Another consideration is the fragmented nature of non-banks, leaving more room for a breakdown between their origination and servicing divisions.
Ginnie’s strategy is to increase scrutiny of an issuer’s liquidity and sources of funding, more frequently and closely valuating MSR portfolios, and raising the attention to operational capability.
Ginnie is primarily a guarantor. Its issuers are the responsible entities where the servicing assets are concerned — raising Ginnie’s sensitivity to the health and liquidity of the overall market for agency MSRs.
If an issuer fails, it prefers to transfer servicing to other issuers rather than acquiring the MSRs itself.
Another issue facing the government-owned corporation is an increase in the number of counterparties it has to manage.
Ginnie said it would like to see servicing be a more attractive business.
