Ginnie Mae Fills the Private-Lending Gap
The steep financial downturn of recent years has produced dramatic changes in the U.S. housing market. As private investment in home mortgages has declined – due in large measure to investor reticence – the public sector’s role has expanded to help take up the slack. In particular, the government-owned financial firm Ginnie Mae has stepped in with a proven financial model that provides much-needed stability in the housing market while minimizing taxpayers’ financial risk. As this article discusses, a new pilot program also positions Ginnie Mae to assume an even more significant role in improving housing affordability for homeowners across the nation.
Ginnie Mae, formally known as the Government National Mortgage Association, was created in 1968. Ginnie Mae has one line of business: guarantees on mortgage-backed securities of government-backed loans. Loans from the Federal Housing Administration, Department of Veterans Affairs, the U.S. Department of Agriculture, and HUD’s Office of Public and Indian Housing are eligible. The vast majority of these mortgages are for single-family homes, though Ginnie Mae also guarantees mortgage-backed securities for multifamily housing. Essentially, Ginnie Mae’s guaranty provides a final, critical layer of protection for investors in home mortgages, thereby encouraging expanded investment. The resulting liquidity improves homebuyer access to affordable housing through low-interest government-backed loans.
What Ginnie Mae Does
When a family applies to a bank or other lending institution for a home loan, the lender might offer them a government-insured financial instrument such as an FHA loan. When a sufficient number of these loans have been written, the loans are pooled into a mortgage-backed security (MBS), which is then sold to investors. Then, the loan servicer – either the lender or another financial institution that has purchased servicing rights – services the loans and manages the security.
Ginnie Mae then guarantees, with the full faith and credit of the U.S. government, that the investors will be paid the principal and interest from the underlying loans in a timely manner. As compensation, Ginnie Mae receives an annual fee of 0.06 percent of the total principal of the loan. As Ginnie Mae’s President Ted Tozer points out, this guaranty ends up cutting the interest rate on the security by up to 1.5 percent – making it a great deal for the issuer of the security. Ginnie Mae has earned revenues between $700 million and $1.6 billion a year, which it transfers to the U.S. Treasury. The agency has maintained an unblemished record of profitable MBS program operation over four decades of market change and disruption.
A number of factors ensure that Ginnie Mae’s guarantees are reliable. First, Ginnie Mae occupies the “fourth-loss” position for loans it guarantees. Ginnie Mae only pays investors if the homeowner, the government agency that backed the loan, and the security issuer exhaust their resources, typically through bankruptcy. If Ginnie Mae is required to pay, the full faith and credit of the United States guarantees payment. In addition, Ginnie Mae only guarantees securities of government-backed loans, taking advantage of the participating agencies’ role in underwriting the component loans. Finally, Ginnie Mae sets a number of standards, such as capital requirements, that issuers of securities must meet to qualify for the guaranty.
In comparison, the similarly-named government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac perform a broader — and at times, riskier — array of activities, such as securitizing and guaranteeing the underlying loans. Fannie and Freddie occupy the “second-loss” position. Moreover, Fannie and Freddie’s securities are not explicitly backed by the full faith and credit of the U.S. government. Fannie and Freddie also differ organizationally from Ginnie Mae, in that Ginnie Mae is a wholly government-owned corporation located within HUD’s organizational structure. In contrast, Fannie Mae and Freddie Mac are currently government-sponsored corporations under the conservatorship of the Federal Housing Finance Agency.
Ginnie Mae’s Growth
Before the financial crisis in 2007, over half of single-family mortgage-backed securities were issued by private companies. As of 2014, the vast majority are issued by Ginnie Mae, Fannie Mae, or Freddie Mac.
This shift has brought about extraordinary growth in Ginnie Mae’s portfolio. As Ted Tozer comments, “It took [Ginnie Mae] 40 years to get to $1 trillion in [mortgage-backed securities] outstanding; then from 2010 we grew by half that volume, reaching $1.5 trillion.” At its current rate of growth, Ginnie Mae will soon overtake Freddie Mac as the second-largest single-family mortgage securitization platform.
As the Urban Institute puts it, “Ginnie Mae may be the GSEs’ less famous cousin, but its tremendous value cannot be disputed.” Following the burst of the housing bubble, borrowers have increasingly relied on government-backed loans for access to mortgage lending. Ginnie Mae’s guarantees have facilitated domestic and international investment to enable those loans.
Potential Expansion: The Chicago Federal Home Loan Bank Pilot
In November 2014, Ginnie Mae launched a pilot program with the Federal Home Loan Bank (FHLB) of Chicago. This program promises to increase small lenders’ ability to make affordable home loans by creating a new means by which these institutions can sell their loans and raise additional capital.
Lenders must meet minimum capital requirements to qualify for Ginnie Mae guarantees on securities. Smaller community banks sometimes struggle to meet those requirements. As a result, these institutions lack direct access to investment from the secondary market. Access to that market would mean smaller institutions could make more affordable home loans.
As Gina Screen of Ginnie Mae puts it, in the new pilot program, “FHLB is the conduit that makes that happen.” With approval from the Federal Housing Finance Agency, the Federal Home Loan Bank of Chicago is now able to serve as an issuer of Ginnie Mae securities. As such, the Bank will be able to purchase government-insured loans from small lenders, hold on to those loans, and pool the loans into securities guaranteed by Ginnie Mae. If the pilot proves successful, the goal is to expand the program to the other Federal Home Loan Banks.
The Future of Ginnie Mae
Moving forward, Ginnie Mae also faces new challenges from systemic changes in housing finance, as it discusses in a September 2014 position paper, An Era of Transformation. Non-bank financial institutions are now major players in the housing industry as traditional depository banks leave the market. Six of Ginnie Mae’s top ten loan issuers in June 2014 were non-bank institutions; in 2011, only one of the top ten was a nonbank issuer.
Ginnie Mae has directed its strategic planning to respond to this transformation in housing finance. In October 2014, the company announced more robust requirements to ensure that issuers are financially stable. At the same time, Ginnie Mae has emphasized the need to ensure that home mortgage servicing remains an economically viable industry.