For most of their existence, the government-sponsored mortgage companies Fannie Mae and Freddie Mac have been the nation’s largest backers of residential home loans. Now a distant cousin is challenging their reign.
So far this year, Ginnie Mae, a corporation wholly owned by the government that packages mortgages backed by the Federal Housing Administration and other agencies, has issued more mortgage bonds than Freddie Mac, making it the second-biggest funder of home loans.
Ginnie Mae today reported record earnings, with net income of almost $1.2 billion for the fiscal year ending Sept. 30. The profit surpasses the company’s previous high of $906 million in 2008. Ginnie Mae said it financed nearly 60 percent of all U.S. home purchases during the year, reflecting the increasing role FHA has been playing in the market.
“We’ve done a really incredible job supporting the housing market,” Ginnie Mae President Ted Tozer said in an interview. “And the taxpayer makes a ton of money on it.”
In the last two years, Ginnie Mae has issued more than $750 billion in securities, compared with $167 billion in 2005 and 2006, according to Inside Mortgage Finance, a trade newsletter based in Bethesda, Maryland. This year, through October, Ginnie Mae issued $263.3 billion in single-family mortgage securities, compared to Freddie Mac’s $251.5 billion. Fannie Mae, the oldest of the three guarantors, sold $418 billion.
Unlike Fannie Mae and Freddie Mac, which have drawn more than $150 billion in taxpayer aid since being seized by regulators in 2008, Ginnie Mae will return a profit to the Treasury Department because the company is more insulated from risk.
Fannie Mae and Freddie Mac were established as private companies with implied government backing and bear nearly all of the credit risk of failing loans. Taxpayers now own about 80 percent of their stock as a result of the 2008 bailout. Ginnie Mae, by contrast, is a catastrophic backstop, stepping in only when a servicer fails.
And as a federal corporation housed at the Department of Housing and Urban Development, Ginnie Mae’s bonds are explicitly backed by the full faith and credit of the U.S. government, making them popular with risk-averse investors.
Congress created Ginnie Mae in 1968 to generate capital for government mortgage programs. The company developed the first mortgage-backed security in 1970. Today, its bonds are populated with loans insured by the FHA, the Department of Agriculture, the Office of Public and Indian Housing and the Department of Veterans Affairs.
Line of Defense
As Washington explores ways to fix the mortgage market, some groups say Ginnie Mae is an example of how the government could retain a role in the market without the kind of taxpayer risk posed by Fannie Mae and Freddie Mac. Under the Ginnie model, the FHA and servicers are the first lines of defense when a loan defaults. Ginnie pays investors only when a servicer fails.
That happened when fraud was discovered at Taylor, Bean and Whitaker Mortgage Corp. The Ocala, Florida-based company was servicing $26 billion in Ginnie Mae loans when it collapsed into bankruptcy in 2009.
While the cost of Taylor Bean’s failure is still being tallied, Ginnie Mae’s $600 million in loan-loss reserves “are more than adequate to recover any losses,” Tozer said. The company has $16 billion in capital reserves.
The Housing Policy Council, a Washington trade group that represents financial firms and big mortgage servicers, thinks Ginnie Mae could be a model for a future mortgage guarantee system where the government serves as a backstop.
“There’s more protections for the taxpayer,” council Vice President Paul Leonard said. “And the government guarantee gives institutional investors confidence.”
Given its rapid growth, Ginnie Mae has challenges ahead. As Bank of America Corp. (BAC) and other big servicers look to exit the business, Tozer is trying to woo smaller players into selling and servicing Ginnie Mae securities.
“Our model is something people don’t really understand,” Tozer said. “It’s the government having its cake and eating it, too.”
To contact the reporter on this story: Lorraine Woellert in Washington at firstname.lastname@example.org.