WORD ON THE STREET: The challenges in housing finance have an impact not just on the mortgage industry, but also on the national and global economies. Falling home values, high rates of mortgage delinquencies and foreclosure, and the loss of millions of jobs strain families and communities.
The economic problems in the U.S. extend beyond our shores and have led to the erosion of global investors' confidence in all but the most secure investments. These factors have perpetuated credit constraints for consumers and businesses alike and are further hampering recovery.
Uncertainty and volatility in the economy and the aftermath of the unnecessary risk-taking have limited investor appetites for any mortgage-backed securities (MBS) other than those insured or guaranteed by the U.S. government or the government-sponsored enterprises (GSEs). This has resulted in a lack of private capital and corresponding financing, which is reflected in the low rate of issuance of private-label securities over the past three years.
We must revive the private-label market. Going forward, the administration is committed to ensuring that private capital markets – subject to strong oversight and standards for investor protection – are be the primary source of mortgage credit and bear the burden of losses. It is crucial that this transition away from government's oversized role is measured and doesn't upset a still-fragile housing market.
The task before us will not be easy, as the MBS market has long relied on government involvement. Much is needed in the way of change if we are to create an environment that is attractive to private capital. Ginnie Mae stands ready to help with these efforts.
The administration believes the securitization market should continue to play a key role in housing finance. That market, however, requires meaningful reform so private investors can confidently participate in the housing market and provide an alternative funding source for mortgages outside of the traditional government-supported institutions.
Ginnie Mae is the financing arm of the U.S. Department of Housing and Urban Development (HUD) and other government insuring agencies, so the levels of MBS we guarantee are directly related to the levels of mortgage loans other government agencies insure. Along with the Federal Housing Administration (FHA), Ginnie Mae has implemented policies that shore up our risk management and may provide a model for building confidence in the private-label securitization process.
For example, Ginnie Mae implemented increased net-worth, capital and liquid-asset requirements for all issuers across our single-family, multifamily and home equity conversion mortgage (HECM) business lines. Imposing these requirements reflects Ginnie Mae's commitment to prudently manage risk, while requiring issuers to retain more capital and liquidity to absorb potential losses and advance delinquent payments to investors.
Our capital and liquidity requirements can be looked at as a different, but very effective, form of ‘skin in the game.’ Ginnie Mae MBS consistently trades with tighter spreads to the Treasury than those of the GSEs and significantly better than private-label securities. This directly contributes to government-insured borrowers' obtaining the lowest interest rates possible for consumers during a crisis.
Transparency and full disclosure are critical elements in attaining the best execution. The administration believes increased disclosure on underlying mortgage collateral is key to increasing standardization and accountability in the securitization chain. Our efforts to expand loan disclosures in our securities have been well received in the market.
Under my direction, Ginnie Mae began releasing the number and dollar value of modified loans, FHA short-refinance loans and HECM Saver loans contained in our pools. The new disclosure initiatives are designed to spur more efficient pricing of our securities. As part of our continuing efforts to strengthen transparency and disclosure, Ginnie Mae also began releasing monthly disclosure files on outstanding MBS approximately two weeks earlier each month.
And during fiscal year 2010, we announced two important operational changes that will allow small lenders to more easily and efficiently do business with Ginnie Mae; this will help to ease liquidity strains. To reduce the interest costs associated with carrying loans until they can be securitized and settled, Ginnie Mae implemented program changes to allow daily issuance of multiple-issuer pools. These changes should allow issuers to use warehouse lending lines more efficiently. In addition, we recently allowed issuers to securitize single loans in multiple-issuer pools.
And I insisted that Ginnie Mae work with Fannie Mae and Freddie Mac to implement a Uniform Loan Delivery data set. Use of the data set will standardize the definitions of the data elements lenders are required to provide when issuing securities. This means loan-delivery information will be standardized across the industry, further increasing transparency.
An important matter to help stem the tide of foreclosures is establishing national standards for mortgage servicing. The administration supports several immediate and near-term reforms to correct problems in mortgage servicing and foreclosure processing. One immediate step is to reform servicing compensation to align it with industry incentives. We are working with the Federal Housing Finance Agency (FHFA) to explore alternative servicing compensation structures.
A more efficient servicing compensation model could provide for better servicing of nonperforming loans and could help address some of the nation's foreclosure problems. Given the positive impact a resolution to this issue could have on the mortgage industry, we are excited to join FHFA in addressing this matter. I have significant experience in loan servicing compensation and capital markets, and I look forward to contributing leadership towards this initiative.
Winding down Fannie Mae and Freddie Mac
Clearly, the current market in which Fannie Mae, Freddie Mac and Ginnie Mae guarantee 95% of all securities is unsustainable. It exposes taxpayers to too much risk. For investors, uncertainty about the future of the GSEs impacts decision making. It is difficult to plan production and identify appropriate secondary-market outlets when pending legislation looms.
Also, as long as the GSEs offer a secondary-market outlet for mortgage loans with below-market pricing based on a government-supported cost of capital, private-label transactions will be disadvantaged. The administration's proposal to increase GSE guarantee fees, increase the capital ahead of their guarantees and wind down their investment portfolios will end uncertainty and create space for greater private-sector investment.
The current private label securitization process works with limited oversight. A neutral party is needed to ensure accountability and transparency. The role of bond trustees may need to be expanded. Bond trustees are currently responsible only for distributing monthly principal and interest payments to investors. We should consider whether bond trustees need the ability to make sure loans are serviced properly, have the authority to require the repurchase of defective loans by issuers and give guidance to servicers on loan-level loss mitigation issues.
Additionally, providing authority to bond trustees through private label securities contracts to require issuers to cover some or all catastrophic loss could help restore confidence in our securities markets. Bond trustees are an obvious choice for this expanded role, but there may be other options. The point I want to make is that a strong, well-capitalized entity is needed to assume some of these responsibilities.
Addressing Fannie Mae and Freddie Mac alone will not give rise to a housing finance market that meets the needs of investors, nor will it guarantee that private markets can effectively play a more dominant role in the mortgage market. We must work together to map our way forward by looking at some of the recommendations provided above.
In recent years, fundamental flaws occurred at almost every link in the mortgage process. We are now all well aware of the advantages and disadvantages of securitization. When securitization is managed appropriately, it is a very efficient conduit for capital.
However, when insufficient attention is paid to the quality of the collateral or the end product is so complex that no one understands the risk, the consequences can be disastrous. Significant reform is needed to help address the flaws that led to the crisis and to rebuild trust and integrity in the mortgage market.
This is especially true for the securities markets. Many investors in private-label securities believe that investing in today's market often requires them to take excessive and unpredictable risk. Restoring their faith in the markets will require greater transparency, standardization and accountability in the securitization process. As someone who has worked in the capital markets for more than 30 years, I welcome the opportunity to work with Congress to develop a solution that meets the needs of homeowners, investors and taxpayers.
Ted Tozer is president of Ginnie Mae. This article is adapted and edited from testimony presented on Feb. 16 before the U.S. House Financial Services Committee's Subcommittee on Insurance, Housing and Community Opportunity. The full testimony is available here.
