Ginnie Mae Reviews Rules for Services as Nonbanks Expand

Ginnie Mae President Ted Tozer, whose agency increasingly relies on nonbank mortgage companies, said he’s evaluating if they have enough easy-to-sell assets to survive in times of distress.

The U.S.-owned company, which guaranteed the first mortgage-backed security in 1970, now backs $1.5 trillion of debt. It may increase liquidity requirements for the firms that issue and service Ginnie Mae bonds to protect its profits and taxpayers from losses, Tozer said in a phone interview this month.

“Basically every default we’ve had was due to the issuer running out of cash,” said Tozer, 57, a former National City Corp. executive who became Ginnie Mae’s head in 2010. “We’re evaluating it right now.”

Mortgage companies that don’t take deposits, such as Ocwen Financial Corp. and Nationstar Mortgage Holdings Inc., are facing scrutiny from several regulators as they expand their role in lending as well as collecting and passing on payments to investors. Nonbanks serviced 35 percent of Ginnie Mae’s single-family loans as of June, up from 22 percent three years earlier, and issued 54 percent of its new securities that month, an increase from 19 percent, according to agency data.

“An entity like Ginnie Mae needs to make sure that their servicing partners have staying power in good and bad times,” said Clifford Rossi, a former bank risk manager who is now executive in residence at the University of Maryland’s Robert H. Smith School of Business in College Park. “There’s a role for nonbanks to play in the market, especially as other regulations affect banks, but we have to make sure they can survive the types of extreme events the industry tends to see.”

Selling Contracts

Banks, which face new regulations that can force them to boost the capital they must hold against mortgage servicing rights, have been selling the contracts to nonbanks and scaling back lending that creates new ones. Banks now service about 75 percent of U.S. mortgages, down from more than 90 percent less than three years ago, New Residential Investment Corp. Chief Executive Officer Michael Nierenberg estimated this week. The trend is likely to continue and push the banks’ share down to 50 percent, he said on an earnings call for the firm, which co-invests with Nationstar.

As nonbanks expanded, Benjamin M. Lawsky, the superintendent of the New York Department of Financial Services, began probing everything from potential conflicts of interest at Ocwen to mortgage-modification practices at Nationstar.

Shares Tumble

Regulators including the Federal Housing Finance Agency, which oversees government-backed Fannie Mae and Freddie Mac, and the Financial Stability Oversight Council are also reviewing nonbanks. Officials are focusing on issues such as the companies’ potentially weaker financial standing and the damage that their collapses might wreck on counterparties or the system.

“The policy environment is going to be rough for the nonbank servicers,” Jaret Seiberg, an analyst at Guggenheim Securities LLC, wrote in an Aug. 4 report.

The attention has led to a slowing of approvals of servicing rights sales to nonbanks. Their share prices have also tumbled.

Ocwen shares have fallen 54 percent this year to $25.43 as of 9:35 a.m. in New York. They closed at an almost two-year low yesterday, days after Lawsky sent a letter to the company over an agreement that he said may be designed to funnel fees to an affiliate for minimal work..

Ocwen and Nationstar executives said this month on conference calls that they aren’t doing anything wrong and are responding to regulators’ concerns.

Ginnie Mae has a particular set of concerns stemming from its mission to serve as a second-line of defense for bondholders against homeowner defaults.

Ginnie’s Risk

The agency, which was carved out of Fannie Mae in 1968 and is now poised to overtake Freddie Mac as the second-largest insurer of mortgage bonds, doesn’t directly bear the risk of defaults. Instead, it takes loans already backed by other agencies, such as the Federal Housing Administration, and guarantees securities comprised of them, adding another layer of taxpayer support to keep money flowing to housing.

Risks to Ginnie Mae come mainly from the role of mortgage servicers, which take payments from borrowers and provide them to investors. If a servicer goes belly up, Ginnie Mae ensures there’s no disruption in payments, seizing its collection contracts and selling them to another company. The value of the servicing can turn negative if there are too many delinquencies to manage, costing the agency money on a transfer, Tozer said.

’Equal Shot’

Tozer and his staffers said in interviews that any new rules that Ginnie Mae adopts won’t just apply to nonbanks. The requirements may have more impact on them, since they lack easy access to cash and are more lightly regulated.

“Everybody should have an equal shot at our program,” Tozer said. “All we’re looking at is risk.”

The agency has been ramping up its standards since the 2008 financial crisis. It now requires servicers to have a minimum net worth of $2.5 million, up from $250,000. Servicers also must hold 0.2 percent of capital against the balances of loans, Ginnie Mae Chief Risk Officer Greg Keith said in an interview. Since 2010, 20 percent of the total capital has needed to be in liquid assets, he said.

Ginnie Mae has also established a “spotlight” servicer program to boost its scrutiny of the rapidly expanding firms with monthly conference calls between the agency and their various units, said Michael Drayne, a senior vice president.

Liquidity Concerns

Tozer said his agency is now considering raising its capital or liquidity requirements, possibly tying the levels to items such as the amount of delinquencies or share of the Department of Veterans Affairs mortgages in a servicer’s portfolio. The VA, whose loans are a fast-growing part of the mortgage market, guarantees generally only 25 percent of the principal.

Ginnie Mae is mostly concerned about the liquidity of its servicers, which must buy the soured mortgages out of its securities before later getting repaid by insurers, he said. Much of their capital is based on the value of hard-to-sell mortgage servicing rights, which are “a great asset, but MSRs won’t help you keep the lights on” when distress hits, he said.

The executive said he wants to avoid clamping down too hard and driving down the value of servicing rights. This could backfire for Ginnie Mae by making transfers more difficult when servicers fail, he said.

“The more people that are playing in the market, by definition you’re going to have more liquid and better values,” he said. “If the MSR value deteriorates, then the consumers rates are going to go up at the closing of the loan, there’s no doubt about it.”

Well Positioned

Ocwen, the largest nonbank servicer, is well positioned for changes by regulators to capital and other standards, Chief Executive Officer Ronald M. Faris said this month on a quarterly earnings call. Ocwen’s purchases of servicing rights includes a deal with a bankrupt unit of Ally Financial Inc., in which it still needs to bring on 250,000 Ginnie Mae-related loans.

“We welcome regulatory oversight because it is good for the industry,” Faris said on the call. “It increases confidence in the markets, raises the standards for all servicers and removes marginal players.”

Nationstar CEO Jay Bray said that “the regulatory landscape is a way of life for us” on an earnings call this week. “Have the costs increased? Yes. Will they continue to increase? Probably.”

Ginnie Mae is funded by the fees it charges for guaranteeing mortgage securities. It posted $628 million of net income in its last fiscal year, which ended Sept. 30.

Good Investment

The agency has about 120 employees and is asking Congress to allow it to retain about $15 million more of its revenue to hire about 80 more staffers, Tozer said. He wants employees watching five or six different servicers rather than 30, he said.

“It’d be really a good investment,” he said. “I want our account executives to be able to look at financial statements and see liquidity start to deteriorate, so we can avoid any crisis situation.”

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