The Government National Mortgage Association – also known as Ginnie Mae – is a remarkable innovation and a proven success.
As the Ginnie Mae web site notes: “When the surge in home foreclosures further depressed housing values and the nation’s overall economy, Congress passed the National Housing Act of 1934 (Act), a key component of the New Deal. The Act created the Federal Housing Administration (FHA) to help resuscitate the U.S. housing market and protect lenders from mortgage default.”
The National Housing Act was amended in 1938 to charter Fannie Mae, and in 1968 Fannie was split in two, creating Ginnie Mae, which provides a secondary market for FHA, VA, and RHS loans to provide liquidity to mortgage lenders.
By accessing investors nationally and even worldwide, Ginnie Mae has helped us create an effective and resilient home mortgage finance system that is the envy of the world, facilitating long-term, fixed rate mortgages.
When interest rates doubled in 2022, homeowners in many other countries, like England, were hit hard as their variable mortgage rates skyrocketed. American homeowners holding fixed rate mortgages, on the other hand, were largely insulated because of the securitization role of Ginnie Mae (and Fannie Mae and Freddie Mac) in facilitating long-term, fixed-rate mortgages.
In contrast, the Silicon Valley Bank seizure showed the folly of banks funding long-term mortgages with short-term deposits. Without Ginnie Mae (and Fannie and Freddie), the damage to the United States would have been incalculably higher, had we instead relied on banks funding mortgages in portfolios rather than these broader secondary markets.
An important component of Ginnie Mae’s success is its strong and consistent record of profitability. As the Community Home Lenders of America (CHLA) documented in its 2022 Annual IMB Report, Ginnie Mae has consistently produced profits year after year, even in 2008 — and in 2023 and 2024 is expected to contribute an additional $3 billion to the federal coffers.
Ginnie Mae risk is low, because Ginnie Mae does not take any significant credit risk — but its impact is powerful due to securitizing federally guaranteed loans in order to facilitate access to long term MBS investors.
Another critical component of Ginnie Mae’s success is its broad base of approved “issuers.” Issuers are mortgage lenders and servicers approved to securitize Ginnie Mae Mortgage Backed Securities (MBS), consisting of FHA, VA, and RHS mortgages.
A broad base of Ginnie Mae issuers increases borrower choices and competition, and in turn reduces loan originators’ reliance on large aggregators. That is a significant benefit for mortgage borrowers.
We saw how important that is when COVID hit three years ago. When Congress granted borrowers a “forbearance” option to skip mortgage payments without penalty, many aggregators pulled back, temporarily abandoning the market or imposing less competitive rates and terms. But borrowers working with Ginnie Mae issuers were generally spared this adverse treatment because these lenders were able to directly securitize the loans.
Ginnie Mae serves dynamic real-world MBS markets and has proven its nimbleness in responding to changing circumstances and needs. For example, just in the last year, Ginnie Mae acted to shorten the required time frames for re-securitization of reperforming loans that went through loss mitigation to allow smaller MBS pool sizes.
The FHA is also to be commended for its recent announcement that it is developing an option to allows issuers to carry out loss mitigation for distressed borrowers without the costly impact of pulling lower interest loans out of Ginnie Mae pools. These changes will help borrowers and the lender/servicers that originate and service FHA loans for them.
But there is one more action that would make Ginnie Mae an even more effective program: a cash window.
Creating a cash window for loans that Ginnie Mae securitizes
The concept of a cash window is simple, and we know it works, because Fannie Mae and Freddie Mac already have a cash window. Under this cash window, approved lenders (“seller/servicers”) simply sell their loans directly to Fannie and Freddie. Fannie and Freddie then turn around and securitize the loans themselves in the secondary market, bringing in a master servicer to service the loans.
Some may argue there is no place for smaller servicers in the Ginnie Mae program. The CHLA disagrees. As noted, one of Ginnie Mae’s greatest strengths is its broad based of lenders and issuers.
An even broader base of Ginnie Mae participants would be good for borrowers. Creating a cash window for Ginnie Mae would help homebuyers and homeowners by creating more competition, which lowers mortgage rates and expands consumer choices.
Creating a cash window would help smaller lenders that are not interested or able to become a Ginnie Mae-approved issuer by enabling them to access Ginnie Mae MBS markets without having to go through third-party aggregators.
A cash window would also help existing Ginnie Mae-approved issuers by creating the option to pursue the best execution, through either a cash window or direct issuance.
Who would oppose this? Possibly the big aggregators, who understandably don’t want to lose some of their business. But Fannie and Freddie demonstrate there is plenty of business left for the aggregators, even with a cash window.
What would it take to make this a reality? Ginnie Mae already has the expertise and experience to pull this together. The main action that is needed is for Congress to authorize this by adopting legislation to authorize Ginnie Mae to purchase whole mortgage loans.
Congress should start debating this option and move expeditiously to make it a reality.
Scott Olson is the executive director of the Community Home Lenders of America (CHLA), whose members are small and mid-sized independent mortgage banks (IMBs).
