In a recent paper presented by The Urban Institute, Ted Tozer, Nonresident Fellow in the Housing Finance Policy Center of the Urban Institute, proposes that Ginnie Mae support the housing system to stabilize financing for independent mortgage banks (IMBs).
In “Ginnie Mae Support for IMB Funding,” Tozer, who spent seven years as President of Ginnie Mae, discusses how Ginnie Mae should evaluate how its current guarantee authority could support short-term funding for IMBs. One of the methods he suggests is that commercial paper to be established to support IMBs’ ability to fund buyouts of loans that are severely delinquent or mortgages that are required to be bought of the home equity conversion mortgage-backed security pools.
“By creating this new stable and lower-cost funding source, Ginnie Mae issuers of mortgage-backed securities and home equity conversion mortgage-backed securities will be able to reduce their costs of servicing and allow them to support borrowers in financial distress more effectively,” said Tozer in the report.
Tozer notes that since the onset of the housing crisis, commercial banks have been retreating from the single-family mortgage origination and servicing business, and IMBs have filled the void left in their absence.
“Currently, more than 60% of conventional loans are being originated by IMBs, and more than 90% of government loans are being originated by IMBs,” noted Tozer. “The major challenge that IMBs face is the instability and costs of their funding.”
Tozer, prior to joining the Urban Institute’s Housing Finance Policy Center, was a Senior Fellow at the Milken Institute’s Center for Financial Markets.
Previously, Tozer served President of Ginnie Mae for seven years, bringing with him to the institution more than 30 years of experience in the mortgage, banking, and securities industries. As president of Ginnie Mae, Tozer actively managed nearly $1.7 trillion guarantees of mortgage-backed securities (MBS), and more than $460 billion in annual issuance. During his time at Ginnie Mae, Ted led the modernization effort of the Ginnie Mae Securitization Platform, overseeing the transition for a depository-dominated issuer base to an independent mortgage banker-dominated base. He was the Obama Administration point person for the rewriting of the HARP program, and also oversaw the transitioning away from the Ginnie Mae I program to the Ginnie Mae II program. Prior to Ginnie Mae, Tozer served as SVP of Capital Markets at National City Mortgage Company for more than 25 years, overseeing pipeline hedging, pricing, loan sales, loan delivery, and credit guideline exceptions.
Tozer continues in his paper by detailing the history of IMBs, noting that commercial banks replaced savings and loan associations as the backbone of single-family mortgages in the early 1990s, and these commercial banks wanted to diversify their sources of income.
“Banks’ income was heavily weighted to interest spread products,” Tozer explained. “Interest spread product income had become volatile in the 1980s with the rapid interest rate increase and the deregulation of interest rates paid on deposits. Before the 1980s, the interest rate banks paid on deposits was fixed, which slowed the increase in interest rates banks paid depositors and minimized competition for deposits by commercial banks.”
IMBs eventually became correspondents of the big bank servicers, and in order to maximize servicing profitability during the early 2000s, Tozer explains that banks reduced servicing costs by minimizing investment in technology and minimizing staff.
“The inability of big bank servicers to handle the tidal wave of delinquencies opened them to massive criticism and lawsuits,” said Tozer. “Commercial banks found out that servicing single-family mortgages was more than processing payments for a fee. Commercial banks realized that the level of profitability for servicing a loan could not compensate for the reputational risk of servicing. In the 10 years after the housing crisis, banks have pulled back from servicing single-family loans.”
Tozer outlines two suggestions on how Ginnie Mae’s current charter could support the origination of government loans and the servicing of delinquent loans:
- IMBs could fund the closing of government loans using commercial paper guaranteed by Ginnie Mae, and the newly closed loans would be pledged as collateral to the commercial paper.
- Ginnie Mae could support the servicing of delinquent loans, as IMBs could issue Ginnie Mae-guaranteed commercial paper to fund the loans that are in default and in loss mitigation, and the funds from the issuance of the Ginnie Mae-guaranteed commercial paper would fund the buyout of the loan from the mortgage-backed security.
“A Ginnie Mae guarantee of collateralized commercial paper issued by IMBs will be a giant step toward assuring that the single-family mortgage industry will offer homeowners low-cost and stable financing,” said Tozer. “From a historical perspective, monoline entities’ dominance of the single-family market is a return to normal, not an aberration. There is no indication that commercial banks will return to a dominant position in the single-family finance industry in the foreseeable future. The Biden Administration needs to create structures that will allow IMBs to effectively serve the single-family mortgage market through all economic cycles. Ginnie Mae guaranteeing commercial paper will stabilize IMB funding without putting taxpayers at risk.”
Click here to read Tozer’s entire proposal, “Ginnie Mae Support for IMB Funding.”