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Speeches

Remarks by John Getchis from the 2013 American Securitization Forum
Published Date: 1/29/2013

Remarks by John Getchis, Senior Vice President, Office of Capital Markets, Ginnie Mae

American Securitization Forum 2013
Concurrent Breakout Session:  Government-backed Securitization Programs

Tuesday, January 29, 2013
Las Vegas, Nevada

I want to seize Phil’s [Bracken] enthusiasm for this and give you an orientation of what Ginnie Mae is doing in the most recent year. I think the purpose is to familiarize your with our business model, familiarize you with the targeted lending that we do, so as the housing policy discussion hopefully advances in Washington, D.C., people start to understand that there are really sub-markets and sub-constituencies that are being served by Ginnie Mae, and certainly Freddie Mac and Fannie Mae. So as we try to decide where private capital should be, where the government’s role needs to be and should be, we do that on an informed basis so that we know what we’re basically unwinding if necessary.

We’re a wholly-owned corporation of HUD, so our fiscal year ends each September like the Federal government, so we recently concluded in 2012. Our outstanding MBS portfolio that we now guarantee is at $1.34 trillion—that is a high. We add about $9 billion of net new production each month, the current rate at the market now. Our business model and our responsibility are solely to provide capital market liquidity to the government-insured lending programs. These consist of FHA, VA, Rural Housing and public Indian housing programs sponsored by various agencies of our federal government. We provide liquidity on average and consistently about 98 percent of all those loans that are originated end up in Ginnie Mae MBS. In FY 2012, gross new issuance was $388 billion worth of MBS. And most importantly, we are a self-sustaining corporation. We had a surplus of $600-plus million in FY2012. Our business model with its explicit government guarantee has not burdened taxpayers by requiring funding. We’re totally self-sustaining.

What programs do we maintain? Really three distinct programs consist and comprise those statistics. Our single-family program is the largest, the oldest – the MBS; that portfolio is about $1.2 trillion, and it has a compound annual growth rate of 21 percent since the beginning of 2009, as the crisis kind of took hold. So we have filled a void there through the FHA and VA lending programs.

We also are a primary lender in a multifamily space. Our portfolio is about $68 billion outstanding. The compound annual growth rate on that since 2009 has been a steady 14 percent year over year over year. It’s an important program that we do. We basically support not only multifamily housing but a considerable amount of health care; assisted living facilities are in there, as well as hospitals. Also FHA is one of the few government guarantee programs that have construction lending assigned to it and that is part its product mix.

Our reverse mortgage program portfolio is about $38 billion outstanding as of the end of the fiscal year, and it has, at least in the early part of its lifecycle, tremendous growth – on average over 123 percent year over year. I think you’re all familiar with some of the letters and comments and news with respect to addressing that program, so we’ll see some adjustments there.

Finally, a lot of what FHA/VA lending does is actually purchase money mortgages; 50 percent of our activity is purchased money, and the Ginnie Mae share of all agency purchase volume is 50 percent as well. In the fourth quarter of our year, that translated to $53 billion of purchased money mortgages that went through those recent three months.

With respect to all the regulations that keep coming down: As Phil indicated, that has a cost. But more importantly it’s going to have some behaviors that it creates, with respect to at least the Ginnie Mae space, a couple of areas where we start to ask questions and try to anticipate the effects.

Under the QM rule, we saw that FHA/VA programs have a seven-year phase-in with respect to QM. I think the issue there is certainly that it impedes what the private capital can and cannot be, but with respect to the existing programs you’re either exposed to safe harbor or you have a potential for presumption if your fees are too high. And with the trend of FHA raising MIP fees, certain LTVs, certain categories of loan type and loan size, it could get awfully close to that definitional line. So it will be interesting to see what the lender behavior is with either participating in that area or using that as a hard stop with respect to FHA.

Another thing that has occurred with respect to the QM rule is that FHA can collect post-settlement interests that, when a borrower prepays on the second day of the calendar month, the lender can collect the full 30 days of interest. That will end on January 2014. So with respect to our Issuers, that’s going to have some additional working capital requirements that need to be considered.

In the space of Basel III: Because of our explicit government guarantee, we continue to enjoy the risk capital arbitrized for regulated entities. Our most recent pronouncement was for high-quality liquid asset ratios that Ginnie Mae, MBS falls into tier one, which means it has no haircut and no limit in the amount that regulated entities can have in this category. And certainly I think you all know that the risk-based capital requirement as well is zero percent, similar to Treasury securities.

MSRs, unfortunately, get treated equally as all others. I think that would be a pressure on certainly regulated balance sheets on some of our larger Issuers, and particularly because that is a mark-to-market component. If we see rates back up here, those durations can extend the values of those portfolios. Even though the outstanding loan balances that they service don’t increase, the value of MSRs could jump with sensitivity.

I think there is always a lot of discussion about what the new securitization model needs to be, should be, etc. These are what I call critical elements, or even a tip list of where I think discussions need to get into some serious levels of additional detail. I think one, first of all, in setting housing policy or where government is or is not has to decide really: Do we want broad access to the global capital? We need rate buyers, we need credit buyers, but we also need store of a wealth of sovereign buyers, as well, in the product mix if we want to fund a large dollar amount of housing finance. I’m not saying a large percentage of housing finance; I’m saying a large absolute dollar amount of housing finance.

I think it’s also important, and this is where I think the Ginnie Mae model has proven a strong degree of success, that there is an alignment of interests from the lender all the way through to whoever has insurance risk, credit risk and certainly the investors as well. Under the Ginnie Mae model, the lender has the responsibility and obligation to meet time, principal and interest. I don’t know of any stronger alignment of interests of the loans that you originate than having that statement.

So Ginnie Mae doesn’t step in until the Issuer has financial incapability to meet that obligation. I think also when we set parameters of where government involvement is, etc., we need to have a market that has sufficient scale. That means that the human capital, the working capital, the investment capital, from dealers to investors, to Issuers, to servicers, need to be a worthwhile endeavor.

And finally, many times what gets lost in discussions is that – whether it is continuing with government involvement or private capital – we cannot forget the need for a well-functioning TBA market. That’s the functionality that allows originators to provide borrowers rate locks to a 30-year, fixed-rate mortgage, allows originators to hedge their position, and allows the market fulfill shorts, pair-offs, and deliver front months and forward months without much interruption.

I assure you that everybody at Ginnie Mae is quite busy. This is what we’re focusing on. It’s really three areas. One is improving a disclosure of the underlying collateral of our MBS pools. We’ve already provided information on our first-time home buyer mortgage insurance premiums, third-party originators. And we are committed to providing loan-level disclosure by the calendar fourth quarter 2013 for both our single-family programs and our reverse mortgage programs. We’re also working on our existing multi-class REMIC programs. We provide liquidity to the markets through single-family, multifamily and reverse mortgage structured transactions, so we continue to review those.

Things that we have done, things that we are considering: We’ve already adjusted our Callable Note program to reintroduce optionality by allowing the call price to be set above par. We plan to liquefy REMIC-trustee receipts so that underwriters don’t have to cover business days in which the MBS collateral is submitted for securitization in REMIC and that it cannot be used as secured collateral. So we’re fixing that, and we’re working on our platinum ARMs, which is really a liquidity and function and service that we provide. We’re rolling out the disclosure on that. We’re considering platinum ARMs, and we’re working to improve that product. And finally, the whole issue about having a market that has scale means that we will be doing some serious investigating of the possibility of consolidating the Ginnie I and Ginnie II single-family programs, to ensure that we have critical scale for the TBA market.