Mortgage servicing rights
The government mortgage market is very different from what it was ten or even five years ago, especially for Ginnie Mae. In 2011, four of the top five issuers of Ginnie Mae mortgage-backed securities (MBS) were banks; at the end of 2017 four of the top five issuers were non-depository mortgage banks.
This change has implications for how Ginnie Mae oversees the mortgage servicing rights (MSRs) that underlie its securities. Ginnie Mae MSRs come into being when mortgage loans are securitized — they are the right and obligation to collect and remit funds from the mortgages. MSRs are valued and shown on the balance sheet of the firm that has the responsibility for the servicing function. In a sense, MSRs are the collateral for the guaranty Ginnie Mae places on its mortgage-backed securities: if an approved lender/servicer fails to live up to its obligations under our MBS program, it may be required to forfeit the MSRs it holds, and the value associated with them.
The value of MSRs, and the health of the market in which they are financed and (sometimes) traded, has become increasingly important as a result of the shift from banks to non-banks in residential finance. This is because MSRs are typically a much more significant component of the financial structure of non-banks than they are for banks.
Following are examples of how Ginnie Mae is working to preserve the value of MSRs, and the health of the MSR market:
Combatting rapid loan prepayments from “churning”
As Ginnie Mae investigated a trend of persistently fast prepayments uncorrelated with economic conditions, it became apparent that the cause was lending practices that exploited the terms of the VA refinance program, in ways that were causing harm to veterans and losses to Ginnie Mae investors. We moved quickly and implemented new guidance that curbed the problem, and this was followed recently with federal legislation that should protect veterans for the long term. This will also give investors greater confidence in the value of securities, which translates into a lower cost of homeownership.
These actions will also have a positive impact on MSR values, because the harmful business practices also cause losses for the firms that invest in Ginnie Mae MSRs. Avoiding servicing losses where possible is worthwhile, because such losses are likely eventually to be passed along to homeowners.
Fostering increased investment in Ginnie Mae servicing
As we announced in our recent white paper, Ginnie Mae 2020, we are also exploring way to make financing more available to holders of Ginnie Mae MSRs, and to make it possible for a wider variety of institutions to participate in this market.
These would not necessarily be easy or quick things to accomplish, but we are pursuing them because the benefits of diversifying investment and financing in this field are large. Owning and servicing MSRs is a capital-intensive proposition, and the more avenues that exist for capital to flow into the system on attractive terms, the less likely it is that there will be a systemic breakdown that makes it more difficult to finance homeownership.
MSRs are an arcane, and in many ways underappreciated, topic but an effective MSR market has never been as important as it is now. Ginnie Mae can be relied upon to continue to look for ways to improve this segment of the overall residential finance system.