Earlier this month, Ginnie Mae proposed significant increases in financial requirements for independent mortgage bank issuers and a new bank-like risk-based capital requirement.
The Community Home Lenders Association (CHLA) acknowledges that Ginnie Mae has a responsibility to monitor the risk of its issuers. But, as the only national organization exclusively representing IMBs, CHLA is concerned that these changes could reduce access to mortgage credit, disproportionately affect smaller issuers, and increase issuer concentration.
When Willie Sutton was asked why he robbed banks, he allegedly replied, “Because that’s where the money is.”
So today, CHLA submitted a detailed comment letter, asking Ginnie Mae to withdraw the proposal – or at least rework it to focus on larger issuers – “Because that’s where the risk is.”
CHLA’s January 2019 Report on Ginnie Mae pointed out that at the time, “Ginnie Mae’s largest 15 issuers constitute 75% of GNMA securities.” Ginnie Mae itself has acknowledged that its greatest financial and systemic risk is with its large mega servicer/issuers. And resolution costs for smaller issuers are much lower because they are easier to absorb.
What is the harm in applying these significant new financial requirements to smaller issuers? The CHLA letter points out that driving smaller issuers out of business or into the arms of larger servicers will “reduce access to mortgage credit, due to increased issuer concentration and fewer loan securitization choices.” This would undermine the administration’s priorities for achieving racial equity and increasing homeownership.
Moreover, applying these stringent new requirements to smaller issuers could actually increase Ginnie Mae’s financial and systemic risk, due to increased industry concentration.
And the increased net worth and liquidity requirements seem arbitrarily tilted against smaller issuers. They exclude Private Label Securities (PLS) (the source of the 2008 housing crisis) and portfolio loans — both of which larger issuers are more likely to service. And they make no distinction between actual and scheduled remittance responsibilities, which ignores the lower financial liabilities that go with the actual option that smaller issuers more commonly select.
CHLA also believes the proposed new risk-based capital requirement should be scrapped altogether — for IMBs big and small. This new standard inappropriately applies a bank-like capital standard to non-banks — with an unduly short period to come into compliance. It would increase mortgage costs due to a reduction in the value of Mortgage Servicing Rights, discourage origination of small balance mortgage loans, and encourage churning of refi loans (which increases prepay speeds).
There is a reason the IMB share of Ginnie Mae issuance skyrocketed from 12% in 2010 to 90% today. As CHLA’s recent Report on IMBs shows, IMBs do a better job of serving minorities, underserved borrowers, and lower FICO score borrowers than banks.
Therefore, imposing onerous new risk-based capital requirements on IMBs will simply make it harder for these underserved borrowers to get a loan or raise the rates or costs of a loan. This would undermine the administration’s goals of racial equity and promoting homeownership.
Ultimately, CHLA questions whether Ginnie Mae is following its statutory mandate to balance promoting access to credit with managing its portfolios with a “minimum loss.” Instead of applying that “minimum loss” standard, Ginnie Mae explicitly justifies its new requirements using a much stricter standard of “minimizing risks.”
To be clear: Ginnie Mae already has almost no credit risk, since it merely reinsures loans that are already 100% or mostly guaranteed by the federal government. And Ginnie Mae is currently running a record profit of $2.4 billion dollars in the midst of COVID — a real-life stress test for issuers that included a universal forbearance option and a huge spike in defaults and servicer advance responsibilities. So, it is not clear how onerous new requirements on smaller issuers is either necessary or appropriate at this time.
The lesson of the 2008 housing crisis is clear: focus on the too-big-to-fail entities, focus on systemic risk. CHLA does not pretend to tell Ginnie Mae how to target supervision on the large mega-servicer issuers that service the great majority of their loans. But that is where its focus should be — while at the same time protecting the smaller loan originator/issuers that ensure that consumers have mortgage choices, fulsome competition, and personalized service.
Scott Olson is the Executive Director of the Community Home Lenders Association (CHLA).
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