Eligibility Requirements for Single Family MBS Issuers

Michael R. Drayne
Acting Executive Vice President
Ginnie Mae
425 3rd Street, SW, Suite 500
Washington, DC 20024

Dear Acting Executive Vice President Drayne:

The American Bankers Association (ABA)  appreciates the opportunity to comment on the request for input (RFI) issued by Ginnie Mae regarding eligibility requirements for Single-Family MBS Issuers. The RFI requests public comment on proposed revisions to capital and liquidity requirements that apply to issuers approved to participate in the Single Family program for Mortgage Backed Securities (MBS). Ginnie Mae also requests comment on whether the proposed revisions can be implemented without undue or counterproductive disruptions to issuers’ ability to conduct business.

ABA member banks are critical participants in the national mortgage markets as originators, servicers and investors (both in portfolio loans serviced by others and in mortgage-backed securities and similar secondary market investments). On behalf of their customers and shareholders, our members have a vital interest in the effective functioning of primary and secondary mortgage markets, as well as in the stability of our financial system. For these reasons, ABA supports Ginnie Mae’s efforts to develop solid safety and soundness standards for all Single Family program participants, including nonbank mortgage servicers. ABA encourages full consideration of the proposed enhancements advanced in the RFI for maintaining Single Family issuer approval. We appreciate Ginnie Mae’s intent to align eligibility standards with the actual risk posed by the program, and we fully support the agency’s effort through this RFI to ensure that any enhancements are carefully calibrated and implemented in order to promote the stability of our nation’s mortgage finance system.

Overall, ABA concurs with the important observations in the RFI that "changing risk characteristics – such as the increased size of the guaranteed portfolio(s), the changing profile of the issuer base, and a greater systemic vulnerability to economic stress and liquidity shocks – have necessitated a more rigorous set of financial requirements than was in place during the recent Global Financial Crisis." ABA also agrees with Ginnie Mae’s general approach that development and implementation of any new requirement must be “undertaken at a measured pace… to minimize disruption during the transition to higher standards.” Such caution and commitment to continued analysis is appropriate and should guide Ginnie Mae’s actions in avoiding issuer stress and systemic risk arising from the COVID-19 pandemic and other potential shocks to the system.

We note that Ginnie Mae is not alone in its concern regarding the changing landscape of mortgage servicing operations. The Conference of State Bank Supervisors (CSBS) recently published findings pursuant to a proposal entitled, “Proposed Regulatory Prudential Standards for Nonbank Mortgage Servicers.” In that notice, CSBS notes that firms that specialize in mortgage loan servicing have grown “dramatically in size, complexity and importance,” and that such growth had increased systemic risks in the nonbank mortgage servicer sector. This assessment follows a previous and more robust 2019 finding by the Financial Stability Oversight Council that there has been exponential growth of nonbank mortgage origination and identifying servicing as a new risk to the U.S. financial system. The Federal Housing Finance Agency (FHFA) has also responded to changes taking place in the servicing industry, and directed Fannie Mae and Freddie Mac to update counterparty standards for mortgage servicers to ensure the safe and sound operation of the Enterprises.

Most recently, the risks associated with financial stability of nonbank servicers was displayed during the initial stages of the COVID-19 pandemic. Absent the swift action of the Federal Reserve and other federal programs that helped stabilize financial markets earlier this year, potential failures in the ranks of nonbanks may have led to more severe damage to the U.S. economy. In short, the expansion of nonbank mortgage servicing, and accompanying increases in systemic risk, are well-documented by policymakers and regulators. These developments and market evolutions call for a focused reassessment of the need to enhance capital and liquidity standards for such entities.

That being said, ABA recommends a measured approach to implementing any new standards. As with any other effort to reduce systemic risk, there is risk that improper implementation has the potential of reducing issuer participation, and that excessive requirements can undermine market demand for Ginnie Mae MSRs while threatening higher prices and/or reduced credit options for consumers. These are especially important considerations given that Ginnie Mae heavily supports FHA, VA, and USDA loans which provide meaningful home-ownership options for low-to-moderate income borrowers. In this sense, ABA commends Ginnie Mae’s assurances in the RFI that any revisions to the eligibility requirements will be calibrated to avoid potential disruptions. We concur with this restrained approach, and note that any final revision should be implemented with reasonable phase-in periods that allow covered institutions ample time to come to compliance with enhanced capital and liquidity requirements. In addition, implementation periods should be followed by continuing surveillance of market reaction and in particular, possible harmful effects on Federal Housing Administration (FHA) and US Department of Veterans Affairs (VA) borrowers.

As a final point, ABA members have assembled recommendations for improving bank participation and competitiveness in Ginnie Mae’s Single Family MBS program.  These recommendations are beyond the scope of this solicitation for comments, but we would welcome the opportunity to meet with Ginnie Mae staff to better discuss possible approaches for positive reforms. 

In conclusion, ABA supports Ginnie Mae’s objectives of assuring a strong and durable Single Family program for MBS, and we encourage advancing with proper consideration of these proposed revisions that minimize risk to the government’s unconditional guarantees. Mortgage servicers—both bank and nonbank—serve as the critical conduit between mortgagors and investors in residential mortgage loans. All players must therefore be in sound financial condition and the applicable prudential standards for all Single-Family MBS Issuers must assure broad systemic health, and be as developed and robust as those applied to banks.  

Sincerely,

Rod J. Alba