MIAC® recently interviewed Ted Tozer, President of Ginnie Mae, for its publication Perspectives. Under Ted’s careful direction, Ginnie Mae has grown to more than $1 trillion in MBS, assuming a greater role in the secondary mortgage market as Fannie Mae and Freddie Mac regain their footing. What stands out from the interview is not just Ginnie Mae’s commitment to doing things differently than it has in the past, but also its commitment to moving forward. Following Ted’s lead, customer service at Ginnie Mae is paramount in following this new direction forward. What follows is the heart of that conversation with one of the most influential people in today’s housing market.
Interview with Ted Tozer
MIAC®: Looking back over the last year and a half, what do you see as most memorable during your tenure to-date at Ginnie Mae? Also, what do you see in the coming year with regard to those things most critical to you and the agency?
Tozer: The thing that I’ve been most proud of is our ability to deliver significant accomplishments toward becoming more customer-centric. For, example, we’ve been able to build up our account executive staff so that they can service our issuers better. This has been facilitated by an impressive amount of ongoing support from the Administration. This support has come not just from the HUD Secretary, but also from the Office of Management and Budget. OMB has been very helpful, so I really can’t stress enough how the Administration has provided significant support in buying into this concept. We’ve pretty much been given a free hand, and have been trusted to do what’s right. I think that speaks well of the Ginnie Mae organization.
Also, Congress has been supportive with passage of the 2012 HUD budget. Congress is allowing us greater autonomy by removing Ginnie Mae from the HUD budget. And what’s interesting about our budget is that when one looks at HUD, Congress is relatively specific about how the money should be spent. Congress allocates specific amounts money for the block grant program, so much money for designated items. With us, they said “Here’s your money; you can spend it how you think best, for salaries and other necessary expenditures to do what you think is appropriate.”
The biggest thing I’ve talked to folks about on Capitol Hill and at OMB is that Ginnie Mae is evolving. We’re really trying to change the organization, and we need the flexibility to be able to hire contractors if we need to, hire the talent we need to, and introduce a more efficient and customer –centric style of management. Congress has been very supportive of this approach; it is an incredibly positive development. At first I was concerned that I would run into a lot of roadblocks. But once I laid out for people the vision of where I think Ginnie Mae needed to go, I think everybody’s bought into it, and I’ve had very little resistance. Of course our financial results help a lot. When you’re consistently earning money for taxpayers that gives you a bit more latitude. Congress, OMB, our HUD Secretary and others are letting us do what we think is best to get the job done.
MIAC®: As you talk about hiring additional Account Executives and bringing in the private sector elements that you need, it sounds like you’ve accomplished a lot since you’ve been with Ginnie Mae. As you look toward the coming year, where will your focus be?
Tozer: My focus will be on continuing to find ways to better meet the needs of our issuer base. Just like the concept of our recognition agreement, doing our single loan pooling and other progressive things we’ve done this year. Continuing to provide more outreach to our issuers, especially now with the transition the industry’s going through is key. For example, Bank of America getting out of the third party the business has now changed the whole complexion of selling to aggregators, and many lenders are now deciding to service. I was talking to our person responsible for issuer application review and he said right now we’ve got 80 applications pending to become issuers. That’s just incredible, considering that our whole issuer base, when I joined Ginnie Mae, was less than 300 issuers and we’ve got 80 applications just in the pipeline. And we approved 33 new applicants this past year. Bringing all those new people on board will create challenges for us as far as giving them service but I’m committed to making sure we have the staff to service them properly.
We also are reviewing our operational systems to make sure they’re state of the art. We’ve got a multi-year project underway to completely replace our old systems that date back to the 1970s with up-to-date systems. We’ll continue that into 2012. We’re also reviewing our risk management structure again, now that we have a portfolio of $1.2 trillion. The goal is to keep Ginnie Mae moving forward. We just have so many things going on right now. I think that’s the reason we’ve been able to recruit a lot of high quality people. I think people are excited about the things we’re trying to do, and I think that’s part of the draw.
MIAC®: You’ve talked about what you’ve been doing since the beginning of your tenure and what you’re going to do over the next year or so. It’s clear you really want to bring Ginnie Mae more into the 21st Century in terms of systems and people and becoming more customer-centric. Are there strategic goals beyond these that you’re focused on for the next five years?
Tozer: Beyond those key goals, our biggest concern is risk management, simply because we’re the custodians of the U.S. Guaranty. As we get bigger and we take on more and more issuers, it’s essential we have the risk management regimen we need to make sure we really know who’s in the program, how they’re doing and to be able to have an early warning system in place when issuers are in trouble. We just need to keep evolving all those aspects of our business to make sure we’re able to give great customer service, whether it’s to the investment community that’s buying the Ginnie Maes, the issuers, or to the tax-payer by protecting them or actually making as much money as we can for them by minimizing the losses we’re going to have from the Guaranty being called upon.
MIAC®: Speaking of the Guaranty, as you know there was recently an audit and subsequent report on FHA’s Mutual Money Insurance Fund (MMIF) and the results were positive. However, some of the reports in the industry press question whether the fund will be sufficient to cover losses from mortgages with a vintage prior to 2009. What are your thoughts on whether the MMIF reserves are sufficient to cover future potential losses?
Tozer: The actuaries have indicated that there is still a cushion. Even though that cushion is not what we’d like to see, it appears that there are adequate funds there, so I have no reason to question the actuarial analysis that was done. And keep in mind that whatever the findings, it in no way impacts Ginnie Mae’s ability to protect the Guaranty. Which brings to mind another five-year goal: One of the biggest challenges I have is getting people to understand that our business model is not tied to FHA. That truly our model is simply to leverage the government guaranty to create a homogenous security that can trade in a TBA environment so that investors can buy a billion dollars worth of securities and not worry about whether they’re in Arizona or Utah. It also facilitates foreign investment in the U.S. housing market. That’s basically our model and I don’t think a lot of people really understand that.
MIAC®: Speaking of the Guaranty, you mentioned risk management earlier. Are there specific things you can share that you’re doing with regard to improving your risk management infrastructure as you grow?
Tozer: We’re bringing people on staff that are modelers to be able to do things like run different economic scenarios against our issuers to find out, for example, if employment goes up by ‘X’ or the economy slows down by ‘Y’, what level of delinquencies we might anticipate, as well as what impact various other stresses may have on our portfolio. So, ultimately, the goal is to become stochastic in our modeling to improve our predictive capability. A lot of our models were built back when Ginnie Mae had $400 or $ 500 billion worth of bonds outstanding and now we’re $1.2 trillion. We really need to improve this process to be more sophisticated in how we’re analyzing our issuers, especially as we bring on more and more issuers. Before, when we had this domination of four or five major issuers: Chase, Well Fargo– they’re going to be around no matter what – but as we’re starting to see deconsolidation, we need to have sophisticated models to really understand independent mortgage bankers, so we can try to get involved early in their business challenges. The goal is not to put them out of business, but to help them remediate. My goal is, if we spot someone in trouble because of our modeling, we work with them to try to figure how can we keep them solvent and so that the institution can remain a good partner with Ginnie Mae into the future.
MIAC®: One of the things you talked about is that you’re seeing an increase in the number of people interested in becoming Ginnie Mae approved and you’ve brought on more people to help with that process. Has the approval process itself changed?
Tozer: The only new approval criteria is our requiring more capital and for the first time this past year we’ve required that part of the capital actually be liquid. Ginnie Mae issuers have got to be able to make those delinquent payments. For example, a servicer that has a lot of MSR on their books could have plenty of capital, but now we’re requiring that a substantial percentage of the capital be liquid to ensure that they can make those P&I payments.
MIAC®: Regarding upcoming changes to the servicing fee structure, Ginnie Mae has decided to keep their structure as it is. As you know, FHFA is considering changing that fee structure to either a pay for service fee model or another model where servicers still earn 25 BPs, but 5 basis points would be set aside for potential troubled loans. Can you comment on the role you believe servicers are providing and how they should be compensated for that?
Tozer: As far as the servicer responsibility, going back to all my years in the business, a mortgage borrower was also a bank customer and was treated that way. But when we began to consolidate servicing, borrowers went from being a relationship to a transaction. Once they became a transaction, doing the right thing became less important, and it became about dollars and cents. So, I think some servicers need to take a step back and look at borrowers in the context of the relationship; they are a partner and a customer. It’s just common sense. For example, I was looking through some drafts on the servicing standards that we kicked around here with some other agencies in Washington and one point listed was the timely application of P&I payments; to me, that seems pretty standard, but I guess some servicers must not have been doing that. Another was the idea of returning phone calls within two days. In my mind, that’s your customer; you should be doing that anyway.
From the perspective of some servicers, it could all be about cost, because over the last ten, fifteen years, servicing costs have been driven down. Everyone has prided themselves on how low their servicing costs were, so they could have the biggest MSR they could, which could subsidize their front-end production as much as possible. I think that’s the death spiral we’re in. Hopefully we can turn that around so that servicing departments have as much money allocated to them as they need to provide the proper customer service and not to simply manage servicing cost in the least expensive manner possible. That’s where I’m hoping that all this comes back to, of doing what’s right for the customer.
As far as how servicers are compensated, whether it’s done from an IO strip or dollar per loan, in theory, who knows which approach is best? I think each servicer needs to look at its own issues. I think perhaps what’s most important is that the idea of front-loading all your income to try to not allocate that money for servicing is a mistake. I think we need to all realize that it does cost to provide good customer service and if it means the MSR gets smaller, then it gets smaller. Another question is what this new structure does to new entrants trying to hedge their MSR and the costs they’re going to incur. I think this gets back to the question you raised about the 25 basis points with part of it held in reserve. Should the 25 basis points be 20? Again, who knows what the number should be? But maybe we should pull back a little bit just to minimize some of the MSR’s that are being created, just to help with hedging.. Hopefully, that’s input the industry gives to FHFA. We need servicers to explain how comfortably they’re managing the MSR and how much capital they need to support the asset. It’s a long term decision we’re making here and that’s why I’d encourage everyone to spend the appropriate amount of time explaining their organization’s concerns, explaining what’s unique about their organizations, and educating FHFA on what the appropriate thing to do is.
MIAC®: You did a press release at the MBA annual on the new parameters for the acknowledgment agreement. Basically, Ginnie Mae no longer requires creditors to name a stand-by Issuer when an Acknowledgment Agreement is executed. Instead, when a portfolio needs to be transferred, the creditor is given the opportunity to identify an approved Ginnie Mae Issuer to assume the portfolio. In exchange for limiting its ability to refuse a transfer of servicing, Ginnie Mae requires the creditor to accept the portfolio. What kind of reaction are you getting and what are you seeing so far with regard to your issuers and the rest of the industry?
Tozer: The initial response we’re getting is very positive, everybody is very happy about the concept of being able to leverage up their MSR asset because as I’ve said, for independent mortgage bankers, that’s probably one of the largest assets on their balance sheet, so this helps them achieve the liquidity they need. We’re getting a good response from major lenders. We’ve been tweaking it a little here and there, but we worked with the major lenders and we’re very close to finalizing this with a number of them. I also think it’s of interest to the GSE’s, because I was talking to one lender and he stated that now Fannie Mae said they’re willing to do what we’re doing. But, Fannie Mae’s approach is apparently a little bit different, because they have to enforce reps and warrants, they will need to reserve some portion of the MSR for their protection. For example, I understand they’re stating that the first “X” percentage UPB goes to Fannie and the default, and the rest goes to the warehouse lender; they understand that the lender needs something to cover their rep and warrant obligations. So we may have actually opened up a door for the industry. GSE’s historically have never wanted to give up their rights; possibly our doing this has now got the GSE’s acknowledging that this does improve liquidity.
MIAC®: It sounds like you’ve been able to get the industry to think about the whole process differently.
Tozer: Well, you know, my issue is I just really feel that the independent mortgage bankers have got to be supported. We’ve got so many independent mortgage bankers that, because of the timelines for foreclosures, are just really having a hard time right now and I just hate to have a whole segment of the industry wiped out. That’s why I think this issue of getting liquidity to them is so critical. I would just love for them to get through this rough patch, whatever it’s going to take, to work through these borrower-related bankruptcies and foreclosures. Once we’re through that, at that point they can continue to be a good part in the industry. I think relying 100 percent on banks isn’t all bad, but still the independent mortgage banker, over the years, have always been kind of a stabilizing force; it seemed like they always helped to keep the banks in check because of their entrepreneurial spirit. I’d love to have the independent mortgage bankers remain a vital piece of the industry. Having independent mortgage bankers in our local communities compete with banks helps to keep the industry very competitive, and of course borrowers benefit from that.
MIAC®: Thinking a little bit about the role of government in the mortgage industry and with an eye toward Fannie and Freddie, we know that what happens to Fannie and Freddie is anyone’s guess at this point, but do you have an opinion on what you think might be a good compromise with regard to their role or, for that matter, the government’s role in general, in the market?
Tozer: Well, I think I can say just from my time here at Ginnie Mae that it seems like the place the government really has positive impact is around the issue of liquidity, not so much from the standpoint of the borrower but for the market in general. I was shocked to see how quickly the U.S. housing market has grown. I think right around 2000 or 2001 there were $3 trillion worth of mortgages outstanding, and now we’re at over $10 trillion. I think the idea of being able to raise capital internationally to finance the market requires government support. However, when it comes down to credit risk, borrower credit risk, I think that’s where you’ve got to ask yourself the question: “ How much of our housing market should carry credit enhancement provided by government? Traditionally we have focused on first time home buyers, and low and moderate income persons.
The average borrower should be able to obtain credit without a whole lot of support or risk to the government. However, you do need government support to provide borrowers with low interest rate financing. So as we think about the future role of government, I think we need to consider delinking government support of credit risk and interest rate risk. The GSE model provided implicit government guaranty of both of kinds of risk. But it doesn’t have to be that way. Government support of interest rate risk and credit risk can be separated. A guaranty can be used to provide credit enhancement to encourage lenders to make loans and a separate guaranty can be provided for the interest risk. The guaranty of interest rate risk assures bond holders that they will always receive payment and as a result encourages the flow of capital.
Until I came to Ginnie Mae, I never really appreciated how capital around the world moves so quickly between borders. The government guaranty on securities is what allows that money to be moved so quickly. Holders of big blocks of capital don’t have to do a lot of analysis on the credit risk because they’re relying on the government guaranty. However, I think the government guaranty should be of last resort and should support bond holders. The question is how does one draw the line so that the government is strictly there as a catastrophic backstop that protects the bond investor and the overall process has other industry players with skin in the game? It should be a limited guaranty for borrowers and for lenders. However, Fannie and Freddie being were on the line for dollar one, I think that’s where our current system broke down.
MIAC®: What do you think it would take to get private investors back in the market today?
Tozer: First of all, I think the biggest thing is that investors need to feel that home prices are starting to stabilize to some degree. As a private investor, it’s hard to determine whether your credit enhancement is adequate without knowing how much the collateral is going to deteriorate in value. Economic stability is critical as well. Borrowers may look great on paper, but as long as there is the possibility they could lose their job tomorrow, private investors will remain hesitant. Additionally, based on conversations I’ve had with private investors, they feel there has to be more oversight of the issuer’s originators. A lot of them feel that no one has been looking out for the private investor. In some cases, they feel that the trustees weren’t enforcing the reps and warrants, so if somebody didn’t play by the rules, the private investors ended up taking the hit.
Ideally, there would be some sort of intermediary looking out for both sides that would be willing to say to the seller “You need to repurchase this loan” or to the investor, “Yes, this lender’s delinquencies are high, but they loaned appropriately, and an entire community was laid off when GM closed a plant.” Someone needs to make those kinds of calls. Right now, private investors don’t feel like they’re getting their day in court. Servicers are scared to death because they’re worried that every loan that goes delinquent now will get pushed back. Subsequently, both investors and servicers are fearful in today’s environment, and that’s why I think we need some sort of remediation process. I think that’s part of the issue, but I also think that you’ve got to have adequate disclosures too from the standpoint of any kind of controlled relationship. For example, I’ve talked to a lot of private investors that were concerned that, servicers had subsidiaries doing work for them that were charging too much. It’s this whole breakdown between the investors and the servicers and the originators; trust has just become a real challenge right now. You’ve got to rebuild that relationship. Although these are important issues, really the most important thing is the economy’s got to settle down.
MIAC®: What do you see as the future of HUD, FHA, and VA?
Tozer: I think that HUD, FHA, and VA, all these organizations, including Rural Housing, are all critical right now because of the fact that Fannie and Freddie are too large. The GSEs are just refinancing their portfolios, so really the purchase activity is being supported by these three government agencies. And I think these agencies will be critical to the stability of the housing market for some period of time. I don’t know if it’s going to be a year, two years, or longer. But, until that point, I don’t think you’re going to see a lot of private money coming in to support the purchase money activity unless it has a lot of cushion as far as LTV and down payments, which most borrowers don’t currently have. Most borrowers today have lost much or all of the equity in their homes. Historically, it use to be that once you bought your first home, your next home you’d have 20 to 30% to put down because you made so much money on your first home. Now, it’s as though we have a whole nation of first time homebuyers, so for this reason alone, I think these government programs will probably be around for at least a couple more years. At that point, I think we’ve got to examine how the nation’s housing system evolves into something more sustainable.
MIAC®: You’ve spoken about the responsibilities between servicers and investors and servicers to customers, but what about the responsibility of the customer? Given your background in the banking industry, were you at all surprised that so many people walked away from their homes and continue to do so?
Tozer: Yes, I’m really, to some degree, disappointed because having a mortgage is really a commitment. It’s like anything else: you make a decision and you act accordingly. It’s truly one thing if you’ve lost your job or don’t have the income; I can appreciate somebody saying” I’m stuck”. But, for somebody to make that call because their home is now underwater; that really bothers me. It’s a moral comment on America, because in those situations, people are saying “I’m just going to take advantage of somebody else I think to a large degree, it may go back to this issue of being a transaction, because when you think about it, if you got your mortgage from your local bank, you know the people there. However, increasingly now, it’s this faceless entity, so it’s a lot easier to say I’m not going to make a payment. So, maybe this whole issue of losing customer contact and customer service has led us to this point where it’s gotten so impersonal. But it’s an interesting dilemma we’re in because the whole concept of mortgages is that because people want to live in their home, they’re going to make their payments. Whether their house is upside down or not doesn’t make any difference. If your house was underwater by 20%, who cared; people tended to make their payment anyway. So for people to strategically walk away actually stop paying the mortgage simply because a house has declined in value that is a scary development and a huge change in how people have traditionally viewed “mortgage obligations”. Hopefully, we’re moving away from that and people are willing to take responsibility for their agreements. But, again it’s a two way street. The servicer’s got to be willing and the lender’s got to be willing to live up to their end of the bargain, too. I think we’ve got to bring civility back to all aspects of homeownership. Everybody needs to treat everybody else like a partner throughout the entire process.
David McCraw
Senior Vice President, Client Solutions Group
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