Remarks by Michael Drayne, Senior Vice President, Office of Issuer & Portfolio Management, Ginnie Mae
2013 Mortgage Bankers Association Secondary Market Conference & Expo
"RMBS Servicing and the Housing Recovery"
Tuesday, May 07, 2013
New York, NY
Servicing underlies our mission of bringing capital from all over the world into the housing finance system in this country. The total of the outstanding single-family Ginnie Mae mortgage-backed securities right now is about $1.4 trillion. That means there is about $1.4 trillion in servicing rights supporting that outstanding MBS. We need to have a universe of mortgage servicers that are up to the task and able to fulfill their responsibilities under our program.
The way see servicing at the moment is very much focused on a significant and interesting transformation taking place in the market right now. To put it in context and give some numbers, we think that about a third of the $1.4 trillion in the Ginnie Mae portfolio—the ownership of those servicing rights— will be changing hands over a three-year period, starting in mid-2011 to the middle of next year. That’s a huge change for the Ginnie Mae program. That’s an enormous amount of servicing rights to change ownership. It’s not simply that the ownership is changing, but the new owners of the servicing rights are largely institutions that are new to Ginnie Mae, or new to servicing, or new to the industry as a whole. Managing that change is something that is consuming a lot of our thinking and a lot of our resources right now.
There are a lot of interesting aspects to that. We’re, of course, concerned with basic questions, such as: Do these entities have the competence? Do they have the financial resources to fulfill their function in the Ginnie Mae program? We’re certainly aware that by and large the new owners of servicing rights are non-depositories, whereas, the great bulk of Ginnie Mae servicing had been held by depositories for a long time. A lot of these newer entities have a background in more specialized parts of servicing—or their staff does—and they portray themselves as being more able in areas such as default servicing than some of the megabank servicers have been. That’s another aspect — servicing is sorting itself out in ways that permit a more specialized focus.
There are two key objectives that we have in managing this transformation and the Ginnie Mae program as a whole. One of them is, very simply, we just don’t want failures. Our role is to guarantee that the mortgage-backed security holders will be paid no matter what. We want to make sure that servicers that are overseeing the administration of the pools will be able to make these payments. In some ways, we at Ginnie Mae live in a very simple world, and everything we do revolves around making sure we are taking all the steps and performing the due diligence and monitoring that we can to make sure there aren’t failures.
The second thing we care a lot about is related to that. We want there to be a liquid market for our servicing rights. We have a number of reasons for caring very passionately about that. One is that we want to continue to attract hundreds of billions of dollars into the housing finance system. As I described, what makes that possible is to have servicers that are willing to hold those servicing rights. If there’s a liquid market, and servicers know that if their circumstances change there will be someone else willing to hold those servicing rights, that will make people more willing to participate in the market.
The other, more parochial, reason we care a lot about the liquidity of the market is that if there is a failure, if there is an Issuer of ours that is not able to fulfill its obligations, we would rather there be somebody else that is willing and able to take on those responsibilities immediately, rather than have Ginnie Mae take them on. It’s a strategic initiative of ours to develop other avenues for dealing with default situations than what Ginnie has historically done — take possession of the servicing rights. We did that with the TBW default in 2009. It’s an enormous, time-consuming exercise that doesn’t play to our core strengths. We just prefer someone else do that. To the extent there’s a liquid market for Ginnie Mae servicing rights, that helps us. In the next couple of years, you’re going to see us devote ourselves to doing whatever we can to identify other parties that could take on servicing rights in distress situations and make it easy for them to do it.
That’s really what we’re about. A lot of the more specialized issues that I think the panel will talk about this afternoon are of interest to us, but we really look at them through that narrow lens. For example, the question of servicing compensation — there are lots of interesting viewpoints one could have. It’s a complicated issue in a lot of ways. The main thing Ginnie Mae cares about though is that we want servicers to be compensated at a fair level for what they do. If servicers feel like the compensation is too thin, they’re going to be a lot less likely to take on a Ginnie Mae portfolio at a time when we want there to be a liquid market and we want them to take on a Ginnie Mae portfolio. That’s an example of how, in these areas having to do with policy that governs mortgage servicing, our viewpoint is tied to the health of the Ginnie Mae program.
I think Ginnie Mae is unusual in that, while we are completely a governmental entity (we are administered through the Department of Housing and Urban Development), we are an independent government-owned corporation, and we have a commercial focus. For the health of the Ginnie program, we really need servicing in this country to be a profitable endeavor that people want to take part in. If servicers have a hard time making a reasonable amount of money for the services they provide, it’s not good for us because we have this gigantic portfolio that’s growing and will need to be serviced. We need to pay attention to the market and the liquidity of the market and try to inform the policy debate in order to make sure we are going to have a servicing industry that can stand us and homeowners in good stead for a long time to come.
Moderator: How do you see this new regulatory burden affecting the industry?
Drayne: A lot of the new applicants we see in the Ginnie Mae program who want to become servicers are fairly small shops choosing to come in by using a sub-servicer, which is fine in theory and fine with Ginnie Mae. But it means there are a lot of people trying to play this game who weren’t trying to play this game before, and they’re essentially outsourcing the need to invest in regulatory compliance or systems to a pretty small number of other entities. And that’s not necessarily a bad trend in and of itself, but it’s something we’re watching closely. I think the whole industry should watch closely. Is this going to work with lots of people trying to do things they haven’t done, relying on third party entities to handle the new complexities in this line of work?
Moderator: Can you talk a little about the criteria you use in evaluating counterparties?
Drayne: The Ginnie Mae model is different than Fannie’s and Freddie’s. We have fewer areas we’re concerned about. We don’t have credit risks — unlike Fannie and Freddie. That is the province of FHA, VA and Rural Housing. What we’re looking at is very simple: Do servicers have the wherewithal to collect money and remit money and report on all of those activities? What we’re looking at is largely a function of financial stability, because particularly with these government programs, the amount of time servicers will be responsible for advancing funds is a lot longer than it is in the conventional world. Financial stability and resources are a big part of it, as is just basic competency in managing the flow of money and managing the custodial accounts. That’s what we’re looking at. I will say that Ginnie Mae has more resources than it’s had in the past, and we’re starting to expand the areas that we look at and do some better types of reporting to Issuers about how we think they’re performing. We’re looking more at things like Issuers who have outlying performance when it comes to prepayment speeds and the impact that might have on the program. So we’re doing more, but it all comes down to the basics I’ve described.
Moderator: One last question. What are the key lessons learned from the crisis—macro lessons, and looking forward, what are some of the key challenges facing us as we try to build a new servicing paradigm?
Drayne: I’ll go small with my answer—just a micro concept. We were having a meeting this morning with one of our largest Issuers. We were going over a bunch of operational issues — six or seven of them — that are of concern to Ginnie Mae and this Issuer. We thought we were talking about six or seven different issues, but at the end of the conversation, we realized it was all the same issue. Everything we were talking about had to do with the prevalence, unforeseen a few years ago, of going back into loans and making some modification or change to a loan after the loan originally closed, and all of the operational problems that result from that. Obviously, nobody ever thought of this or anticipated that there would be so much of this going on. To me, it’s an open question: Is this something that arose because of particular circumstances that lasted a few bad years, and we’ll just go back to normal, or is there something fundamentally different about servicing a mortgage loan? When you think the loan is closed, now are you really just starting a chapter where there could be lots of different things happening? I don’t have an opinion about that, but it’s been such a big, unforeseen development that I think it’s an interesting thing to wonder about.