A closer look at Ginnie Mae’s latest digital efforts

Kelsey Ramírez: Welcome to “Mortgage Desk.” Today, you’ll be listening to an exclusive interview that features Angel Hernandez, Ginnie Mae director of MBS policy and program development. Angel is the lead on Ginnie Mae’s digital collateral project. In today’s interview, he will discuss the latest digital advancements at Ginnie Mae, what that means for the housing market, and what’s next from here. Angel, thanks for being on with us.

Angel Hernandez: Kelsey, thank you so much for inviting us to engage in what surely is one of my favorite topics to speak about. So thank you.

Kelsey Ramírez: That’s great. I’m really excited to talk about this. I know that y’all have a lot going on over there. So to start us off, do you want to just tell us a little bit more about the Digital Collateral Program and what the goal behind it is?

Angel Hernandez: Yes, thank you. I think it’s good to lay a foundation for this. So for Ginnie Mae, the Digital Collateral Program, you can think of it as a feature of our larger mortgage-backed securities program. It is the part of our program that allows eligible participants to create and issue Ginnie Mae guaranteed MBS that are backed exclusively by digital pools. Now, digital pools are pools where each loan results from an electronic closing and where the corresponding promissory note is also an eNote. Now, beyond just, you know, the mere inclusion of eNotes, digital pools also have other distinguishing features. For example, in those, Ginnie Mae allows trailing loan documents that are associated with the digital pool. And by these, we refer to security instruments, title policies, for example, to be transmitted and stored electronically.

Now, the same would typically have to be physically transferred through a document custodian, you know, physically who are dealing with traditional paper pools. So again, for participants in the Digital Collateral Program and their ability to do digital pools, right, it is beyond just the fact that they’re able to create MBS with eNotes. It does come with other flexibilities on the collateral side, which is why we call them, you know, the Digital Collateral Program more so than our digital mortgage program. Again, likewise, some other things I can think of here would be the fact that in digital pools, those are going to be eligible to fully leverage other market innovations in this space such as the utilization of remote online notaries, for example.

Now, like other subcomponents of the MBS program, Kelsey, the Digital Collateral Program does have specific rules and requirements. And these govern which Ginnie Mae issuers are eligible to participate. Now, all of those requirements we announced last year when we published APM2010, as well as the accompanying Digital Collateral Program guide. The requirements we have on that guide really are aimed at ensuring that each of the participating issuers that we welcome in into the program, that they do possess the necessary subject matter expertise, systems, technology, as well as overall processes to be able to meet Ginnie Mae and investor obligations as our business model does dictate that, that we do digital mortgages just a little different than how they were typically done for GSE delivery.

Now, you asked what the goal of this is for us? Well, I think first and foremost, the goal is to extend to borrowers, lenders, and servicers in the government-backed mortgage sector full access to the benefits, the value, the convenience, and the security that can be achieved with large scale adoption of digital mortgage technology. You know, I think that a time like this, right, the importance of this goal truly cannot be understated. You know, we’re in a place where industry and consumers need alternatives that support the continuation of transactions in a manner that is fully compatible with public health guidelines as well as perhaps the new and everlasting realities of remote work.

Kelsey Ramírez: Yeah, I mean, we’ve seen that across the industry with, you know, more and more people wanting to look into eNotes and eClosings, and RON has really taken off this year. There’s definitely been that demand there. I mean, we talked about eNotes a little bit, how Ginnie Mae is now accepting those. You mentioned some of the other digital efforts that goes into this. What is the value that this is going to add to the housing market overall?

Angel Hernandez: So, Kelsey, you know, we first announced this in 2018. And I think we were pretty clear back then what the ultimate objective would be and what impact this would have in the industry overall. So, as it stands today, I think our digital efforts really do enable our industry to make a significant leap forward into the creation of a digital mortgage ecosystem, something that I think quite a few of us have been after for a very long time. And that this is an ecosystem that really takes the experience from a borrower’s loan application all the way to securitization. One that is capable of increasing efficiencies and reducing costs throughout a loan’s lifecycle. An ecosystem that we believe can increase access to credit and overall enhance the safety and soundness in our industry segment.

So when it comes to what Ginnie Mae has done, I think, in a rather targeted fashion, our efforts were aimed at directly promoting adoption of those components of these ecosystems that are ready to be deployed today. Right? So we wanted to increase the value proposition and overall return of the investments in people and technology that are needed by lenders and servicers to deploy and support eClosings as well as eNotes. Perhaps this is best illustrated, but by contrast to what would be best for this effort, right?

So prior to the Digital Collateral Program, we know the return on investment for lenders participating in both the conventional and government segments, or perhaps even, you know, private label was somewhat limited in that they would have to maintain two separate distinct and parallel processes from the point of borrower application to delivering to the secondary market, right? One for conventional where they could insert occasions, leverage eClosings, eNotes, and RON. And then a completely separate one for government where they could not.

So I think our contribution, again, into that larger, perhaps more ambitious goal of the full ecosystem is that we’re helping to close that loop, to close that gap, and really make it such that if a lender or a servicer decide that this is the right time for them to invest in digital mortgage technology, that it’s something they are going to be able to use and integrate across their portfolio.

Kelsey Ramírez: Yeah. And, you know, that may be a…there’s some lenders right now that are all on board with eClosings and definitely ahead of the pack. But there are some that are kind of still hanging back to see where this goes. So the fact that they can now do more loan types through the eClosing platforms definitely could spur some encouragement on that end to get more people on board with eClosings in general.

Angel Hernandez: Yeah. I think the fact that this can be leveraged across loan types in more instances, you know, does help with the very human element of it, of being able to create a standard process that everyone in your enterprise can follow, that everyone is familiar with, rather than having to create, again, you know, by 14 or parallel processes where we have experts in one area but not the other. You know, I think that that kind of distinction injects an element of perhaps, you know, sophistication or complexity into operations that, you know, rightfully so some lenders might have sought to evade or delay. So again, I think us coming in enabling the products of eClosings to be delivered into a government securitization, I think, closes that or at least minimizes those risks for anyone contemplating the investment.

Kelsey Ramírez: Yeah, that’s a great point. So talking about that a little bit more. I know Rocket Mortgage is probably the biggest participant in your program right now with as far as originating these eNotes. I know the MBS that y’all announced that you backed just a week or two ago, it was originated by loans from Rocket and they were predicting that we would see a lot more VA and FHA loans being done with eNotes by the end of this year. And sounds like I’m hearing similar comments from you today. What specifically is the goal when it comes to accepting eNotes and the kind of growth that we might see this year?

Angel Hernandez: So I’ll take each of those in parts. So I think in terms of what is our goal, our goal in the offering that we have with our existing counterparties really is to provide them with the flexibility within our program, the structure within our program, as well as the support and know-how as we may to be able to usher them in to eNote production for the government. Right? So again, it’s not… You know ultimately, that becomes a very independent decision for each of our issuers of when it’s the right time for them to enter this space with Ginnie Mae. Our goal is, again, to have a program that is as crisp and as sophisticated to support those endeavors when the time is ready for them.

Now, having said that, I do agree with the assessment just provided because I’m sure are those comments from Rocket Mortgage as well, in that just looking at the pipeline of applicants that we have at the number of inquiries that we’ve been receiving since last July on the program, the request for education, the request for communication from, you know, partners to our issuers such as warehouse lenders, technology providers, that they are all indicative and do point towards exponential growth, you know, in the production of eNotes and in the use of eNotes for FHA and VA over the coming year.

I do think, again, that the situation we have at hand today with the public health emergency is prompting quite a bit of the market in this direction. But I think the fact that Ginnie Mae, you know, was able to do some of this work ahead of that, right, as part of our Ginnie Mae 2020 initiative that we began back in 2018 really positioned us to be in the place where we are today, whereas that demand from our issuers increases and as their own readiness increases, we will be able to accommodate that shift.

Kelsey Ramírez: So y’all have made a lot of big steps this year. You’ve been working on the Digital Collateral Program several years now and we saw a lot of really big advancements over the past year. But I mean, what’s next for you?

Angel Hernandez: Well, we’re certainly not done, Kelsey. Our first objective was to put in place a program that was fully in alignment with the standards, technology, and processes that had been deployed prior to our own digital mortgage efforts, while at the same time ensuring that our digital mortgage efforts were also fully consistent with Ginnie Mae’s business model and its role as a guarantor. So our first objective was to achieve validation of the architecture and model that we laid out in our Digital Collateral Program guide. Which I think to a large extent, we’ve reached that and we continue to reach that with other participants and validating how, again, the rules, requirements, and processes we have in place are able to accommodate a variety of funding, configurations, technology configurations, and delivering processes.

From here, I think the first thing we’ll need to do is do another round of enhancements or updates to the rules and requirements that we have in the Digital Collateral Program guide. Now, these are going to be informed by the best practices, by the lessons learned that we inherit from this initial deployment, right. So really take that experience that we have working one on one with the e-issuer, so the Digital Collateral Program, to see what we can do better, what we can streamline, where additional clarity is needed for other participants, and translate that into actual enhancements to the rules in our guide.

The second thing really is going to be opening up the program to welcome in even more participants, right, perhaps issuers that were not ready to apply last year, but, you know, since we made the announcement, now have set in place, they were closing, you know, programs and are ready to engage with us on this front. Now, both of those are, you know, milestones that I would expect for us to reach this year. Right again, another set of updates to our existing Digital Collateral Program guide, as well as another window of applications for issuers that, you know, have not been able to apply just yet.

Long-term, we do hope to be able to fully integrate the Digital Collateral Program into our securitization platform even more. And what I mean by this is to enable features that increase the efficiencies in how we do things, including, for example, the development of a document custody application that can support auto certification of eNotes, as well as a more targeted loan level tracking of loan status within our portfolio. Now, those larger objectives are likely multi-year efforts. And those will need to be done in partnership with the existing stakeholders in our ecosystem, including, you know, some servicers, document custodians, as we do believe that our business model, which again is that of a guarantor, will continue to dictate some distinctions between our digital program and that which is present at the GSE, so with the Federal Home Loan Banks. So, again, lots of work to do in this space. A great deal of conversation that still needs to take place between Ginnie Mae and stakeholders. But again, it’s all very exciting work and we’re really looking forward to taking the next few steps along this path.

Kelsey Ramírez: Yeah, it definitely is exciting times for Ginnie and then exciting times for the industry as a whole as we continue to move to this increased digital process, digital mortgage. So is there anything else that you wanted to add today? Or also, where can our listeners find more information on the Digital Collateral Program?

Angel Hernandez: So if you visit our website, ginniemae.gov, we have a modernization page. On the modernization page, we do have some of the key governing documents, key announcements, and some training materials that we’ve published over time. So again, that’s the first place that I would direct anyone who wants to know more. The only thing I would add is, you know, for those of you that are thinking of getting involved and have not yet, you know, please write to your state communication, write to your account executive. You know, the success of this program is largely going to depend on the feedback that we receive from our stakeholders. So we do want, you know, as we have over the last three years, we want this to be a very collaborative effort between Ginnie Mae and the industry, and we look forward to, you know, working to that end.

Kelsey Ramírez: Great. Well, thank you so much for being on with us today, Angel.

Angel Hernandez: No, thank you, Kelsey.