Ser­vic­ing

Gin­nie chief vows tougher scru­tiny of is­suers af­ter IG’s crit­i­cism

National Mortgage News - - Contents - By bon­nie sin­nock

gin­nie mae pledged to vet is­suers more thor­oughly af­ter a gov­ern­ment watch­dog crit­i­cized its ex­po­sure to risks posed by non­banks.

A re­port by the De­part­ment of Hous­ing and Ur­ban De­vel­op­ment’s in­spec­tor gen­eral took Gin­nie to task for in­ad­e­quate man­age­ment of the grow­ing num­ber of non­banks among its is­suers. But banks and non­banks alike will be watched more closely, said Michael Bright, the act­ing pres­i­dent of Gin­nie.

“We want more in­for­ma­tion from the is­suers who are our coun­ter­par­ties,” Bright said.

Non­banks, un­like banks, tend to op­er­ate mono­line mort­gage busi­ness and rely more on third-party fi­nanc­ing be­cause they lack bal­ance sheets and de­posits, and could in some cases “see liq­uid­ity dry up faster than a di­ver­si­fied bank,” Bright said.

But “banks can go un­der, too,” he said.

“A bal­ance sheet is not a panacea,” he said, not­ing that di­ver­si­fied busi­ness lines are not nec­es­sar­ily a cure-all. The var­i­ous fi­nan­cial ser­vices a bank of­fer could be, for ex­am­ple, con­cen­trated in a re­gion where there are eco­nomic con­cerns.

Bright’s com­ments fol­lowed soon af­ter the head of the Mort­gage Bankers As­so­ci­a­tion — a trade as­so­ci­a­tion that rep­re­sents many non­banks — chal­lenged the HUD IG’s con­clu­sions.

The re­port “mis­char­ac­ter­ized the role of, and the risks posed by, non­bank is­suers,” David Stevens, the as­so­ci­a­tion’s pres­i­dent, said in a writ­ten state­ment.

Though banks have his­tor­i­cally been more heav­ily reg­u­lated, to­day non­banks are closely su­per­vised by the Con­sumer Fi­nan­cial Pro­tec­tion Bureau and oth­ers, Stevens ar­gued.

Non­banks are “sub­ject to stronger state and fed­eral reg­u­la­tion than ever be­fore, in­clud­ing ro­bust ex­am­i­na­tions by both the states and CFPB and bet­ter in­for­ma­tion shar­ing be­tween reg­u­la­tors at all lev­els,” Stevens said.

Mort­gage com­pa­nies out­side the bank­ing in­dus­try also filled in a gap at Gin­nie when sev­eral bank is­suers fled the mar­ket dur­ing the fi­nan­cial cri­sis, he said.

While those changes help con­tain non­banks’ risk, Gin­nie could do a bet­ter job over­see­ing the unique liq­uid­ity con­cerns they face as the IG sug­gested, Bright said.

It has taken many steps to do this, but those ef­forts were “blunt in­stru­ments,” and the risk needs to be tar­geted more pre­cisely, Bright said.

Gin­nie — which over­sees gov­ern­ment-in­sured mort­gage se­cu­ri­ti­za­tion is­suers — should de­ter­mine the max­i­mum de­fault that it could han­dle for each is­suer, as well as bet­ter man­age non­bank coun­ter­party risk, ac­cord­ing to the IG re­port.

Oth­er­wise Gin­nie might be at risk of hav­ing to take a U.S. Trea­sury draw to stay afloat in the event a largescale is­suer de­fault, Ron­ald Hosk­ing, a re­gional in­spec­tor gen­eral, wrote in the Sept. 21 re­port he au­thored.

“Gin­nie Mae was not pre­pared for the rapid growth and shift in is­suer base, and its staff lacked the skills nec­es­sary to im­me­di­ately re­spond to in­creased risks posed by these changes. As a re­sult, Gin­nie Mae may not iden­tify prob­lems with is­suers in time to pre­vent de­fault,” the re­port said. “Ad­di­tion­ally, it may not be able to prop­erly ser­vice loans ab­sorbed in a de­fault and may re­quire ad­di­tional funds from the United States Trea­sury to pay in­vestors in the event of a large is­suer de­fault.”

The many steps Gin­nie took to ad­dress risk as non­banks grew

from 14% of its guar­an­tees of sin­gle- fam­ily se­cu­ri­ti­za­tions in 2011 to 73% in 2016 were not “timely” or ef­fec­tive enough, ac­cord­ing to the re­port. The prin­ci­pal bal­ance of out­stand­ing is­suance Gin­nie has to over­see also has grown con­sid­er­ably, from $427.6 bil­lion in 2007 to $ 1.7 tril­lion in 2016.

“In an in­ter­nal me­moran­dum, dated March 2017, Gin­nie Mae stated that it would be dif­fi­cult to ab­sorb port­fo­lios greater than 100,000 loans or with high lev­els of delin­quency with­out im­pact­ing ser­vic­ing stan­dards,” the re­port said.

Gin­nie’s ini­tial writ­ten re­sponse to the re­port ac­knowl­edged the risk, but also said that the gov­ern­ment agency “is not wholly with­out the abil­ity to man­age such a sit­u­a­tion,” said Michael Drayne, se­nior vice pres­i­dent in Gin­nie’s Of­fice of Is­suer and Port­fo­lio Man­age­ment.

“The re­port im­plies a de­fi­ciency on the part of Gin­nie Mae that non­de­pos­i­tory is­suers have grown to the scale they have,” Drayne said. “But that this has oc­curred is a func­tion of the hous­ing fi­nance sys­tem’s adap­ta­tion to a va­ri­ety of fac­tors and pol­icy ac­tions.”

Gin­nie is “ab­so­lutely aware that we have seen a mas­sive evo­lu­tion in our is­suer base [and] we’ve seen mas­sive growth in our se­cu­ri­ties,” Bright said. “We are not blind to any of these dy­nam­ics. We will be tak­ing ad­di­tional steps.”

In the past Gin­nie has blamed, and the HUD IG has ac­knowl­edged, that a lack of re­sources plays into chal­lenges the gov­ern­ment agency has faced man­ag­ing non­bank risk, but Bright is not re­ly­ing on ad­di­tional as­sis­tance.

If Gin­nie got more in­de­pen­dence, money and staff as it has re­quested in the past, Bright would en­sure it made “good use of tax­payer funds;” but he added: “That said, I’m not ask­ing for more money. We have a job to do. We’re go­ing to do our job.”

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