Calls for Ginnie Mae to address its long-standing requirements come during a time of declining origination activity, with an industry under immense pressure to survive amid forecasts of an economic downturn. Facing a tough winter ahead, lenders may struggle to make their principal and interest payments to investors, an issue that can be made worse if a recession hits.

Several proposals have been floated to bridge liquidity shortfalls, such as a commercial paper solution, pooling delinquent loans or an update to the Pass-Through Assistance Program. Meanwhile, others argue the solution is for the agency to revamp its requirements.

Ginnie Mae hasn't outlined exactly how it would address this issue, though it has implied the subject is top-of-mind. President Alanna McCargo said in August that issuers' livelihood is "one of the biggest things we need to figure out."

"We do not need to enter another downturn and not know how to support these institutions," she said, while speaking at the Bipartisan Policy Center. "These institutions are incredibly important to the system and the constituents that they serve, so I think we just have to figure out what that's going to look like." 

The central issue

What's troubling nonbank mortgage companies in the Ginnie Mae program is the way the government guarantor "requires all issuers to make advances when a borrower misses paying," said Scott Olson, executive director at Community Home Lenders of America. 

"They require our members – that are not banks – to be a banker to borrowers that miss their payments," Olson said. "We lend the money. We advance the money and it has nothing to do with a company's profitability. It has nothing to do with our solvency but it creates liquidity demands and forces IMBs to become bankers."

While Olson acknowledged that issuers sign up for such obligations, in an uncertain economic environment, lenders could be saddled with a ballooning portfolio of delinquent loans that they have to continue making principal and interest payments on. Some of the top issuers of Ginnie's program are major originators in the field, such as Rocket Mortgage, Freedom Mortgage, Newrez, Mr. Cooper and PennyMac Loan Servicing, the agency's 2022 annual report shows.

According to Pete Mills, senior vice president of residential policy at the Mortgage Bankers Association, the "payment of timely P&I is guaranteed by the U.S. government, but it relies on private entities to make that happen and when you hit a situation where you've got exigent economic circumstances, such as disasters, health emergencies or economic downturn, that creates stress in the marketplace."

The way Ginnie operates is drastically different from the way the government-sponsored enterprises handle delinquencies. 

Delinquent Fannie Mae and Freddie Mac loans are bought out at 120 days by the GSEs, while for the government guarantor, issuers have to advance payments until the loan either reperforms or goes into foreclosure. "In many cases, you're advancing on a delinquent loan in a Ginnie pool for months and months and months and that's a liquidity burden," said Mills.

Potential fixes on the table

A number of solutions have been suggested to alleviate pressures mortgage companies face in having to remit timely P&I payments on delinquent loans for extended periods.

One such proposal has been put forth by Ted Tozer, the former president of Ginnie Mae. His solution calls on the agency to use its authority to guarantee short-term funding for IMBs in the form of commercial paper.

"Currently, if IMBs have a 90-day delinquent loan and they're in a situation where they buy it out of a Ginnie Mae pool, they have to borrow money from a bank and hold it until they can get the borrower current, or put them into foreclosure and then get money back from the FHA or VA," said Tozer. "That's a perfect place for commercial paper."

Commercial paper can be issued to bridge the liquidity gap between when a loan goes delinquent and either becomes current again or goes into foreclosure. 

And some big players in the financial services space think this proposed solution has some potential.

"Freedom Mortgage supports Ted's very thoughtful and detailed proposal which would bring liquidity to the mortgage industry and offer an additional funding option for independent mortgage companies," wrote Rich Jordan, senior executive vice president at Freedom Mortgage, in an email. 

Christopher Mayer, CEO of Longbridge Financial, a reverse mortgage lender, which faces unique challenges in carrying P&I payments also sees commercial paper as a viable option.

Mayer pointed out if a borrower with one of these Federal Housing Administration loans passes away before the balance accrues to 98% of what's called the max claim amount, the FHA won't immediately buy the loan.

"I have to either solve the problem or I have to get the heirs to sell the home. I can't assign the loan while the loan is inactive or in default, and that loan is considered to be inactive [when a borrower passes away,]" he said. "And that problem means that that loan could sit on my balance sheet for months or years."

"Now…the commercial paper solution that Ted has written about would be a big help for reverse mortgage lenders," Mayer said. "But even better – because I just told you these loans can sit on my balance sheet for four years and commercial papers are usually a year, so I'll have to refinance that thing— is [for Ginnie] to allow us to put these into a new securitization."

Others have noted however, that the commercial paper loan solution may hit a stumbling block with Ginnie's attorneys and that there are already private banking institutions that provide short-term funding support in the secondary market.

Another option floated by the MBA is an early buyout security which is pooled into a Ginnie security short term and "will allow the independent mortgage banker to not have to bear the burden of holding that loan on its balance sheet for an extended period of time," Mills said. The trade group is currently working on its proposal for this, which should be made public by the end of this year.

Revamping PTAP to make it more friendly for lenders is another solution, industry stakeholders say.

The MBA thinks with a bit of revisions PTAP can be established "as a standby facility for exigent circumstances, whether it's a natural disaster, another health emergency or a regional or nationwide economic downturn [would be a good thing,]" Mills said. 

But some believe that a few updates to both Ginnie's and FHA's requirements could be the best option.

"Doesn't it also make sense to look at things about the Ginnie Mae program that make it so difficult?" a former executive at the agency, who declined to be identified, said. "[Shouldn't we also take a more holistic view] of the FHA program that operates very differently than the Fannie and Freddie programs to the disadvantage of servicers? My view on this is that Ginnie Mae has no responsibility to any institutions."

Ginnie Mae did not immediately respond to a request for comment regarding what, if any, solution it is considering.

Barriers

No matter what solution Ginnie Mae chooses in the near future, there are plenty of issues that it will have to first address.

First off, any type of liquidity facility will require Ginnie to beef up its personnel and resources, Tozer said.

"Their budget is so skimpy right now that they're barely keeping up," Tozer said. "The industry needs to get [behind the idea of a liquidity facility] so that when Congress goes to approve a budget for Ginnie, they increase their salaries to allow the agency to bring in people to not only build out this process, but also to have the people that are there on an ongoing basis to administer it."

Mills added that the government is currently operating on a temporary spending bill as opposed to an appropriations bill, which has the increased resources that Ginnie has asked for. "If we keep funding the government on a CR, they're never going to get [more resources]," he added. "So it makes that issue important."

Then there's the problem that a proposal that can have a significant impact on how Ginnie operates may have to be approved by Congress. 

"I think Congress is going to want to have a say whether it's okay for Ginnie Mae to be guaranteeing a new instrument," a former Ginnie executive said. "And so that gets into a lot of political calculations of who controls Congress and what does Congress want and so I think that's a big hurdle."