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A Challenge to a Ginnie Mae-Based Approach to Housing Finance Reform

By Michael A. Stegman

Tuesday, December 20, 2016

This post is the seventh in our Housing America Series, aimed at elevating the need for housing policy reforms—from housing finance to affordability—as we move through a pivotal federal election and transition.

While it is too early to tell how the 2016 elections will affect the prospects for ending the government-sponsored enterprises’ (GSEs) lengthy conservatorship, stakeholders of all political stripes should be encouraged by Treasury Secretary-designate Steven Mnuchin’s intention to make housing finance reform a Trump administration priority. While there are many GSE reform proposals out there, the election has elevated interest in one particular proposal because its authors command broad professional respect, have extensive in-the-trenches experience, and enjoy deep Republican ties.

Michael Bright and Ed DeMarco’s proposal to end the GSEs’ conservatorships would use the Ginnie Mae platform to create a new secondary mortgage market and ensure the continuation of the 30-year fixed rate mortgage, a relatively low-cost product that has enabled millions of American families achieve their dream of homeownership. Ginnie Mae currently guarantees securities backed by government-insured mortgages. Bright and DeMarco would expand Ginnie’s authority to wrap private sector credit-enhanced pools of mortgages whose mortgage-backed securities (MBS) would hopefully be as attractive to investors as are Ginnie’s current securities. Rather than doing away with Fannie Mae and Freddie Mac, they would run both GSEs through receivership and transform them into mutually owned and operated insurers that would become prominent credit enhancers in the reformed system. To make all this possible, Bright and DeMarco would remove Ginnie from the Department of Housing and Urban Development and create a “standalone Government Corporation like the FDIC [Federal Deposit Insurance Corporation], with authority over its own budget, hiring, and compensation.”

One proposal would remove Ginnie from the Department of Housing and Urban Development and create a standalone government corporation.

This last step is necessary for a number of reasons, not the least of which is to ensure that Ginnie will have enough staff resources to support an entirely new function: ensuring that each non-government guaranteed mortgage pool delivered to its platform is properly credit-enhanced by private capital before receiving a federal wrap. Evaluating credit risk is not part of its current regime because only mortgages already insured by federal agencies like the Federal Housing Administration are currently eligible to receive a Ginnie Mae guarantee.

Ironically, with all its moving parts, gaining budgetary independence from Congress probably poses the most serious political challenge to this creative proposal. The reason stems from the arcane way Ginnie is treated in the federal budget, through a bifurcated funding system that includes both appropriated and mandatory funding streams. Its extensive contracting outlays and other program-related expenses not directly tied to personnel salaries are funded from the mandatory spending side, which is more flexible in response to business needs and not constrained by the politically-driven appropriations process. However, all direct salary and related personnel expenses that are essential to properly evaluating and managing counterparty risks posed by the growing number and complex structures of Ginnie Mae non-bank issuers are subject to the annual appropriations process.

Because contracts are budgeted on the mandatory side of the budget, the vast majority of the work needed to run Ginnie’s $1.7 trillion enterprise is carried out by private contractors, who are overseen by a small government staff of 140 that is stretched thinly to provide even marginal supervision of the now more than 450 approved issuers. Even with Ginnie’s growing market presence, Congress has been reluctant to expand its appropriated funding, which was a paltry $23 million in 2016, or allow some budgetary flexibility with the use of fee-generated funding that amounted to more than $1 billion this year.

Currently, Ginnie is unable to make basic business decisions on how best to allocate its resources to meet many program requirements: it must either hire a contractor or the work doesn’t get done. Greater flexibility to make these decisions, including the hiring of additional in-house staff, would allow Ginnie to best maximize its net cash receipts flowing to Treasury while also limiting long-term risk to the Ginnie program and, by extension, to the government itself.

It is imperative that Ginnie Mae has sufficient resources to properly oversee and manage its network. 

Ginnie’s diminishing ability to properly oversee its growing roster of diversified issuers—whose overall capitalization and liquidity characteristics are deteriorating as the presence of weaker servicing companies increases—is directly related to the Bright/DeMarco proposal, which proposes to use Ginnie’s current servicing model in the reformed system.

Unlike the GSE model where servicers advance delinquent loan payments to MBS investors for 90 days before Fannie or Freddie buys the loan out of the pool, Ginnie servicers have to advance missed payments to investors for an unlimited amount of time until the loan is resolved, or buy it out of the pool using its own resources. This latter approach creates a tremendous need for servicer financing in times of economic stress when loan defaults escalate.

With a growing share of Ginnie servicers being non-depositories lacking a source of inexpensive funds across the business cycle, a liquidity event causing a servicer insolvency and requiring Ginnie to step in is all the more likely. Under these circumstances, taxpayers will be put at greater risk. It is therefore imperative that Ginnie have sufficient resources to properly oversee and manage its network of issuers and servicers. Yet, Ginnie’s request this year for an additional $5 million in appropriated funds to hire more in-house staff has fallen on deaf ears. If Ginnie cannot convince Congress of the merits of this modest proposal, why should we believe that lawmakers will give the institution total budgetary independence in a vastly expanded, reformed system?

KEYWORDS: GSES, FEDERAL HOUSING ADMINISTRATION, FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), FANNIE MAE, FREDDIE MAC, DEPARTMENT OF TREASURY, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, EDWARD DEMARCO, GINNIE MAE, DONALD TRUMP, MICHAEL STEGMAN, HOUSING AMERICA SERIES, 115TH CONGRESS, THE NEXT AGENDA SERIES, STEVEN MNUCHIN