President McCargo MBA Annual 2022 Conference Speech
Thank you for that warm introduction and good morning, everyone.
It is a great time to be together with all of you.
Since my arrival in Nashville yesterday, I have had a chance to meet with MBA’s Warehouse Lender Council and other key stakeholders, and I look forward to meeting with the Lender Roundtable later today.
This conference is always a great opportunity to meet and connect with a variety of stakeholders and counterparties and discuss the current market landscape, and it’s especially timely this year.
It is a pleasure to share this stage with two phenomenal women in housing finance—FHA Commissioner Gordon and FHFA Director Thompson. I am grateful for our collaboration and partnership. We share a common mission to engage with our industry partners so that we can increase access to credit and improve outcomes for households and communities that rely on our respective agencies for access to affordable homeownership and rental housing.
I have the honor and privilege of being the President of one of the largest and most impactful social enterprises in the world at Ginnie Mae. I take pride in the unique and serious role we have as a government corporation that supports and sustains the financing of affordable housing for millions of Americans. No other entity is quite like Ginnie Mae inside federal government.
We exist to provide a full faith and credit guaranty by the U.S. Government on mortgage-backed securities that are collateralized by loans insured by FHA, Rural Development, Veterans Affairs, and Public and Indian Housing mortgage loan guarantee programs. Our government guaranty attracts capital from around the world toward investment in the U.S. housing market. We are a force multiplier for our insuring and guaranteeing agency partners. Government mortgage insurance gives lenders confidence that they can lend in the communities we are here to serve, and our guaranty gives them the ability to lend at greater scale. We play an important countercyclical role and support the housing market in good times and through stressful periods.
Ginnie Mae has a dual mandate. We not only promote broad and affordable access to credit through our programs, but we support the stability of the secondary market. Our business model is designed such that Ginnie Mae does not take on direct credit risk. An important component of our model is the MBS issuer network and our reliance on their success, strength, and resilience. Today Ginnie Mae has over 360 active single family and multifamily issuers.
As I stand here, Ginnie Mae is in the midst of a massive transformation that will make our business more nimble. We are migrating our state of the art securitization platform to a fully cloud-enabled environment. When our planned business outage ends tomorrow, we will be fully operational in the cloud. This milestone is foundational to the many technological and digital innovations for the future and improves the way we do business with issuers and service providers. This foundation is crucial for the future and to accomplishing our strategic goals. As one example, our digital collateral program is poised for growth and has reached nearly $15 billion in eNotes in the evault in less than 2 years. The program has seen tremendous growth each month. The cloud infrastructure will continue to enable Ginnie Mae innovation as the technologies that support our business evolve.
One of the most important aspects of my job is to ensure we manage risks to the government mortgage programs and that we maintain a stable and equitable housing finance market. The Biden Administration and Secretary Fudge asked me to take on this incredible responsibility to serve America’s housing market and protect taxpayers. I do not take this lightly. I lead our terrific team of public servants at Ginnie Mae and take great care in the decisions we make for the future. I also pride myself and our team on transparency, actively listening, and proactive engagement with the use of evidence and data to guide us. In my two plus decades in housing finance, we’ve experienced historic highs and lows and I have seen this industry weather the most volatile market conditions. Looking back to the start of the COVID-19 pandemic in March 2020, we didn’t know how the markets or households would be impacted, but we worked together to expand liquidity with laser focus on keeping people in their homes and avoiding foreclosures.
Today, we face an unprecedented confluence of market trends. At Ginnie Mae, we understand how these headwinds are creating uncertainty for households and financial institutions alike. The Biden Administration has been focused on all aspects of fighting inflation, while managing what has been one of the strongest economic recoveries we have ever seen post-pandemic. Despite inflation, the country has witnessed continued low unemployment, wage growth, and relatively few foreclosures. As the Federal Reserve continues to address inflation pressures to bring prices down in many sectors, we are feeling the effects in the housing market acutely. In just a few short months, mortgage interest rates have grown to the highest levels we have seen in more than 20 years. This rapid increase in mortgage interest rates has had a direct impact on home purchases and refinances, with some signs of unprecedented year-over-year home price growth finally slowing down in some markets.
As we look ahead and plan for how we each manage through this uncertainty, it's important we reflect on the lessons from our pandemic experience.
When the pandemic first hit, Ginnie Mae instituted the Pass Through Assistance Program, known as PTAP. PTAP was an emergency pandemic program that provided issuers with liquidity assistance for principal and interest advances. Ginnie Mae provided stability at a time when it was greatly needed. Although PTAP was not heavily used thanks to a refinance boom and a record low interest rate environment, Ginnie Mae’s rapid implementation bolstered confidence during a period of unique stress.
Ginnie Mae worked alongside public and private sector partners including the issuer and servicer community to ensure we could manage the pandemic’s impact on the secondary market. We successfully adapted to the moment and introduced new MBS pool types including the Extended Term (ET) for 40 year modifications and Reperforming Ginnie Mae pools (RG).
The pandemic experience showed us all that policymakers and industry can overcome any challenge when we work together. This point is particularly true in government lending. Although Ginnie Mae’s purpose and role are unique, we can only accomplish our mission by working with our agency partners, issuers, and our global investor base.
It is this interdependency that informs our agency priorities and how we manage risk. We are focused on providing clarity to investors and providing liquidity in the secondary mortgage market.
Ginnie Mae’s issuer eligibility requirements are another important risk management tool that helps promote issuer liquidity. These requirements set standards for issuers to meet threshold levels of capital and liquidity to support their business.
The critical role that IMBs play in the government mortgage market cannot be overstated. The makeup of Ginnie Mae’s issuer base is a vastly different profile than we had in 2008. Before the great financial crisis, the overwhelming majority of our issuance came from depositories. The crisis brought great changes to our industry, and with it, a complete shift in our issuer base. Independent mortgage banks now issue more than 90 percent of Ginnie Mae securities each month. IMBs have been an integral part of government lending for more than a decade. The Ginnie Mae program, however, is liquidity intensive. When liquidity needs intensify, independent mortgage bank financing also faces greater strain. Ginnie Mae knows that it is critically important for IMBs to be able to access financing across cycles, because IMBs are on the frontlines every day, making sure new households can achieve homeownership on the lending side and helping struggling borrowers remain in their homes through their servicing role.
The standards we announced in August will enhance market confidence in our issuers across cycles. Because Ginnie Mae is unique, we introduced a Risk Based Capital requirement in our eligibility rules. This requirement was based on evidence from risk analysis and a robust issuer stress testing program and is a prudent step and standard, especially given IMBs growth and integral role in the government mortgage market. The IMB space has not had this type of requirement in the past, and we believe it’s a new and crucial step that will promote long-term stability, given how important MSRs are to IMB balance sheets. Let me be clear: The risk-based capital requirement is about the future. It’s about the long term stability and viability of the government mortgage market.
Although a few observers have raised concerns about our approach to assess IMBs under the risk-based capital framework, Ginnie Mae has received balanced feedback from regulators, lenders, and issuers alike. This framework is a long overdue step to bring us current with the realities of how and who support the mortgage market today.
I know our requirements, particularly the RBC element, has started an important conversation at a really critical time, and it’s been a very healthy conversation for government lending and the system overall. Ginnie Mae intends to continue leading this conversation for the benefit of taxpayers, borrowers, and market participants.
We have been actively engaged with our issuers and stakeholders about the new standards and what they mean for their business models and what the path toward implementation looks like. During the course of this engagement, one thing has become increasingly clear—more time is needed to ensure that we can implement the new standards methodically and for the long term.
This is why last Friday, we announced the 1-year implementation extension for the
Risk Based Capital Requirement to December 31, 2024. It is important to note that the implementation extension is for the Risk Based Capital requirement only. All the other liquidity and net worth requirements remain unchanged from the original announcement. More details can be found on ginniemae.gov.
Our updated standards will strengthen the sustainability of the MBS ecosystem, promote durable access to credit for the underserved, and protect borrowers from volatility in the mortgage markets over the long term.
Let me turn to some other critical items our issuers are facing as I prepare to close.
As I said earlier, Ginnie Mae is always looking at ways to enhance liquidity through our current programs.
To preserve the value proposition of Ginnie Mae MBS during an environment of unprecedented market support by the Federal Reserve MBS purchase program through the pandemic, we instituted the Reperforming Ginnie Mae pools, or RG. RG pools allowed issuers to place reperforming loans into custom pools, as long as they met certain requirements, supporting their ability to perform loss mitigation and preserving the investment value proposition of our TBA securities.
During the past several months, we have engaged with a variety of stakeholders regarding our RG Pool program. We have received many questions about the future of the RG program and feedback on the complexities associated with these pools, especially in this rising rate environment. The early buyout activity during the pandemic has largely subsided given the higher interest rate environment and the transition in delinquencies. So, I urged my team to think hard about how we can give the market clarity on the future of this pandemic-era program.
I’m pleased to announce that by the end of the first quarter of 2023, Ginnie Mae will be changing our policy and requirements for these reperforming loan pools, making RG pooling optional.
In the first quarter of next year, we will shorten the seasoning requirement from 6 months to 3 months and allow issuers the option to re-pool into our Ginnie Mae II Single-Family TBA Multi-Issuer pools. A press release just went out about the planned RG program changes, and we will be releasing more details in an All Participants Memo (APM) soon.
If you take one thing away from my remarks today, let it be this: The past several years have made clear that we can overcome any challenge when we work collaboratively and in good faith. We are going to work through this cycle together, and I am committed to working together with all of you to strengthen our industry so we can endure and continue to support the many households that face the biggest affordable housing challenges of our time.
The Biden Administration, Ginnie Mae, and our government partners are here to support stability in the mortgage and housing market, tackle the tough issues, and work with you to make sure that all Americans can access and maintain their stake in affordable, safe housing.
I look forward to your questions.