November 29, 2017
House Financial Services Housing Subcommittee “Sustainable Housing Finance: The Role of Ginnie Mae in the Housing Finance System”
Key Topics & Takeaways
- DeMarco/Bright Proposal: Throughout the hearing, Bright fielded several questions about a series of papers he authored with Ed DeMarco while at the Milken Institute, that outlined possible Ginnie Mae-centric reforms to the housing finance space. Bright defended some of the ideas within those papers and addressed some concerns that had been previously raised by other market participants.
- Ginnie Mae Portfolio and Fees: There was also substantial discussion about the growth in the Ginnie Mae portfolio and the risks this portfolio posed to the entity. Bright discussed the steps Ginnie Mae has taken to reduce the risks created by its portfolio, including by imposing liquidity requirements on lenders accessing the Ginnie Mae platform.
- Veteran Refinancing: In his testimony, Bright the joint Veterans Affairs (VA) and Ginnie Mae task force targeting aggressive practices by VA lenders. Bright argued that there is no reason for VA loans to be prepaid in short time frames and that Ginnie Mae would soon announce a series of penalties for entities engaged in loan churning.
- Michael R. Bright, Acting President, Government National Mortgage Association (Ginnie Mae)
Subcommittee Chairman Sean Duffy (R-Wis.)
In his opening statement, Duffy discussed the dramatic growth in Ginnie Mae’s portfolio over the last several years and said he looked forward to hearing Acting President Michael Bright describe how Ginnie Mae has managed the growth to reduce risks to the taxpayer. Duffy said he also hoped to explore the Ginnie Mae model in detail and mentioned that Bright and Ed DeMarco (the former Acting Director of the Federal Housing Finance Agency (FHFA)) published a proposal for housing finance reform while at the Milken Institute. Duffy also expressed hope that a new housing finance system will have more private capital involved. He noted that the Ginnie Mae securitization platform can be utilized by private actors while the Common Securitization Platform (CSP) in development by Fannie Mae and Freddie Mac can only be used by those entities.
Subcommittee Ranking Member Emanuel Cleaver (D-Mo.)
In his opening statement, Cleaver said it is important for the committee to hear from Ginnie Mae as part of its housing finance reform legislative push. Cleaver also noted that Ginnie Mae has a small office but a large amount of responsibility, and said that given the small amount appropriated to the agency, Congress should explore whether the entity is sufficiently well-funded. Cleaver closed by arguing that any reformed housing finance system should preserve the government guarantee, broad access to 30-year fixed rate mortgages, and meet affordable housing goals.
Michael R. Bright, Acting President, Government National Mortgage Association (Ginnie Mae)
In his testimony, Bright talked about benefits to market participants of the Ginnie Mae model, noting that the Ginnie Mae platform facilitates the flow of capital into the U.S. mortgage market and provides affordable credit for millions of borrowers. Bright also noted that Ginnie Mae can successfully administer a government guarantee and create a market for homogenous Ginnie Mae mortgage-backed securities (MBS). Bright said that the guarantee works because Ginnie Mae: 1) is transparent about its rules and processes to its investors; and 2) works hard to police lending activity within the program. Bright also described the layers of private capital standing before the government guarantee in the Ginnie Mae model, and said that if a lender fails to remit timely payments on a security, Ginnie Mae steps in to make the payment for them. Bright noted that such a step is uncommon and pointed out that Ginnie Mae has never required emergency federal assistance to operate. Bright also briefly discussed “Ginnie Mae 20202” which aims to bring technology enhancements to the Ginnie Mae platform, and discussed the joint Veterans Affairs (VA) and Ginnie Mae task force targeting aggressive practices by VA lenders.
Question & Answer
Throughout the hearing, Bright fielded several questions about a series of papers he authored with Ed DeMarco while at the Milken Institute, that outlined possible Ginnie Mae-centric reforms to the housing finance space. Duffy led off by asking if Bright still believes in the proposals outlined in those papers, and Bright said he did more so after moving from the Milken Institute to Ginnie Mae. Bright stressed that an explicit government guarantee needs effective administration, and noted that Ginnie Mae already provides that necessary administration and management.
Duffy also asked if the DeMarco/Bright proposal should concern other market participants, such as the investor and lender organizations that have previously testified at subcommittee hearings. Bright said that Congress should consider the concerns of other entities about housing finance reform, but noted that the DeMarco/Bright proposal helps small issuers and that at the macro level, should work for all market participants.
Rep. Joyce Beatty (D-Ohio) also asked Bright to respond to concerns raised by other market participants about the DeMarco/Bright proposal. Bright pointed out that there is no volume requirement to access the Ginnie Mae platform, and that the proposal would also retain the cash window at the government-sponsored entities (GSEs), which should address the concerns of small lenders.
Rep. Dennis Ross (R-Fla.) said he was “intrigued and encouraged” by the Demarco/Bright paper and approved of the idea of layers of private capital in front of a government guarantee. Ross asked if the DeMarco/Bright proposal would keep mortgages affordable. Bright said that the explicit guarantee attracts capital from around the world, makes securities safer, and encourages investment in low cost, lower-interest rate products.
Rep. Brad Sherman (D-Calif.) asked if the Demarco/Bright proposal would lead to higher interest rates for borrowers. Bright said that Milken’s analysis found that interest rates would be roughly the same as they are today.
Rep. David Trott (R-Mich.) said that while he liked the Demarco/Bright proposal, he believes there were political impediments that could prevent its implementation. He proposed the alternative idea of eliminating Fannie Mae and Freddie Mac’s involvement in the refinance business. Bright said he had not considered the issue thoroughly, but did agree that cash-out refinances should “probably not be allowed.”
Rep. Ed Royce (R-Calif.) asked if the utility approach to organizing Fannie and Freddie, which is in several reform proposals, would crowd out private capital and entrench the GSEs as large, too big to fail entities. Bright conceded that some proposals would not eliminate the implied guarantee and the problems it created, and noted that the more complex the intermediary entities, the more difficult they will be to resolve.
Rep. Tom MacArthur (R-N.J.) asked Bright to discuss how a government backstop could function in a way that minimizes risks of “bad actors” writing “bad loans” that put taxpayers at risk. Bright said that an explicit guarantee needs effective policing to make sure the guarantee is granted judiciously. Bright also said that any housing finance system needs credit investors who are exposed to losses from defaults.
Ginnie Mae Portfolio and Fees
Sherman noted that the Ginnie Mae portfolio of MBS has grown dramatically in recent years, and asked if Ginnie needs more money to handle the larger portfolio. Bright noted that Ginnie Mae has a reasonable degree of autonomy for hiring contractors, and has various fees to fund operation and create a capital buffer for its portfolio.
Rep. Randy Hultgren (R-Ill.) asked if the growth in portfolio size has created new risks to Ginnie Mae, and if Ginnie Mae has the necessary tools to deal with its portfolio risks. Bright noted the increase in portfolio size but said that overall size does not create inherent risks. Bright also described the liquidity requirements Ginnie Mae imposes on lenders, and said the true concern is not volume but quality of counterparty capital.
Rep. Wm. Lacy Clay (D-Mo.) noted that Ginnie Mae’s fees are capped by statute, and asked if Congress should raise or eliminate the cap on fees. Bright said that if Ginnie Mae had the authority to set its own cap it would likely use the cap to build a more effective risk management operation.
Rep. Keith Rothfus (R-Pa.) noted a 2014 paper that described the changing landscape for mortgage lending, and found the market has changed to see a large role played by non-bank lenders and servicers who are riskier than traditional banks. He asked Bright what steps Ginnie has taken to address the risks created by this shift. Bright noted that bank or balance sheet lending is not a panacea for risk and that it would be wrong to assume that banks are less risky than non-bank lenders. Bright said that risk management at all institutions is important, and that is why Ginnie Mae has put liquidity requirements on all institutions using the Ginnie Mae platform.
Beatty brought up the dubious practices observed recently in the market for Veterans Affairs (VA) backed loan refinancing, and said that there have been reports of aggressive solicitation and misleading marketing for VA loans. Beatty noted that both veterans and investors have been harmed by these practices, and said she was pleased by the recent announcement by the VA and Ginnie Mae of the creation of a joint-task force to resolve the issue. Bright said that these practices are certainly a major problem and were ones deserving of Congressional attention as well. Bright also noted that Ginnie Mae would soon announce a series of penalties for entities “churning loans” and said there is no economic reason for VA loans to prepay within a few months. Bright also noted that the practice makes investors less willing to buy Ginnie Mae MBS, making credit more expensive other borrowers in the Ginnie Mae system.
Ginnie Mae Organization
Duffy asked Bright if Ginnie Mae is currently grappling with any major operational challenges. Bright said that Ginnie Mae needs to engage in more technological modernization, move towards being eMortgage compatible, and work on its pool splitting capabilities, but that these changes are technical and not major changes.
Cleaver asked Bright to provide an overview of key differences between Ginnie Mae and the GSEs (Fannie Mae and Freddie Mac). Bright noted that Ginnie Mae administers a full faith and credit guarantee, providing certainty to bondholders, and sets standards for lenders using the Ginnie Mae platform. Bright described Ginnie Mae’s functions as “administrative” and that this makes the entity conceptually very different from the GSEs, who make their own securities with an implicit guarantee and buy their loans by issuing debt in capital markets. Cleaver also asked Bright to describe the approval process for Ginnie Mae issuers, and Bright provided an overview of the 4-6-month process.
Credit Risk Transfer (CRT)
Royce asked if the GSEs credit risk transfer (CRT) program has successfully brought more private capital in to play and if the GSEs have the legal authority to engage in more CRT. Bright answered that both are true, and described CRT as “the biggest success story” of the last five years and said policymakers should try to lock in the gains of CRT.
Common Securitization Platform
Royce asked the only question about the Common Securitization Platform (CSP) currently under development by the GSEs, and asked if the CSP could work “in tandem” with the Ginnie Mae platform. Bright readily agreed that the two platforms could work together.
Ross asked Bright for the total number of Ginnie Mae properties have been affected by floods that were not covered with flood insurance, and Bright said that there are 150,000 such proprieties. He conceded it is “not an insignificant problem” and that while the recent spate of hurricanes did not cause major issues for Ginnie Mae, such events create the risk of lender insolvency.
Protecting American Taxpayers and Homeowners (PATH) Act
Clay asked Bright about a PATH Act provision that would reduce the size of the Federal Housing Administration’s (FHA) guarantee from 100 percent to 50 percent, and noted a Congressional Budget Office (CBO) report that found this provision would negatively impact the liquidity and value of Ginnie Mae Securities. Bright said that the VA only guarantees 25 percent of their loans, and about 40 percent of all Ginnie Mae loans are VA-backed, but that the securities are made safer by the blending of loans from the VA, FHA, and the U.S. Department of Agriculture (USDA).
For more information on this hearing, please click here.