While Fannie Mae and Freddie Mac, the two GSEs[1] who’ve received the most attention of late – and much of it bad, after being taken over by the feds in October 2008 – their forgotten little sister, Ginnie Mae,[2] has been quietly growing into a strong young woman – metaphorically speaking.
As opposed to Fannie and Freddie, who served as purchasers of conventional loans[3] in the “secondary mortgage market,” Ginnie only purchases government-backed loans through the FHA, VA, and Department of Agriculture.
The secondary mortgage market does not originate mortgage loans. Rather, it purchases them from the original lenders, i.e., those that fund loans upon the closing of a home purchase. Once the lender takes back the note and mortgage [called a “trust deed” in Oregon] from the borrower, it sells the “paper” to a purchaser in the secondary market, thereby receiving back money to make more loans. The purchaser in the secondary market, e.g. Fannie or Freddie, aggregates millions of dollars of these loans and turns them into securitized bonds [i.e. streams of income flowing from the borrowers’ mortgage payments], and sells them to large investors, such as pension funds and municipalities.
And for those who may not fully appreciate it, let me put a fine point on Ginnie’s importance following the credit and housing crisis: During the 2000s, Fannie and Freddie only purchased loans from lenders whose underwriting conformed to their guidelines [these were known as “conforming loans”]. Their guidelines dictated to the banks the credit criteria required of borrowers in order for the GSEs to purchase the loans. The result was that many folks who had poor or sketchy credit did not qualify for conventional financing, i.e. loans that would be sold to the GSEs. No loan, no home.
Then along came the “private label secondary market” and everything changed. The private label second market served the same function as Fannie and Freddie, with one major exception; it had far lower credit and underwriting standards than the GSEs. As a result, banks could now make loans to people with little or no credit, and in order to make the payments affordable, developed repayment programs that were interest only – and sometimes even less than interest only – called “negatively amortizing loans” or “neg-ams.”[4]
And for those folks who had no down payment, they were given a higher interest rate second loan, thus issuing in the use of “piggy-back” loans consisting of an 80% first mortgage and a 20% second. Again, the sales pitch was that if you couldn’t afford the payments, you could always sell the home and make a nice profit.
Thus, the impact of the private label market meant that now there was a resource for the banks to sell their toxic paper to, i.e. investors chasing higher rates of returns. And the big credit rating agencies, S&P, Moody’s and Fitch, gave “investment grade” ratings to these bundled loans, thus attracting large pension fund money. When the financial crisis hit, the private label market dried up almost overnight. It does not exist to any measurable degree today.
As a result of the tighter post-crisis underwriting standards of today’s lenders, there are many would-be borrowers who cannot qualify for loans. These are not the scammers and flippers of times past, but legitimate working families who want to purchase a home. Enter Ginnie Mae.
Like her better known siblings, Ginnie Mae does not make loans; it acts as a secondary market purchaser of loans from banks. As noted above, it purchases paper from banks that have made purchase money loans through the FHA, VA, and USDA. Then it bundles those loans and sells them to investors, guaranteeing the timely payment of principal and interest. Ginnie Mae securities are the only mortgage backed securities to expressly carry the full faith and credit guaranty of the United States government. This makes it an attractive and safe investment.[5]
Fannie and Freddie’s higher underwriting requirements have had the effect of freezing many potential buyers out of today’s housing market. The result has been that the FHA, VA, and USDA, have become the de facto market for subprime loans. The reason is because these three programs have lower underwriting and down payment requirements. Thus, they have become the primary source of money for folks locked out of the conventional lending market.
So how’s Ginnie doing today to meet the demand? Quite well, thank you. According to a recent article in the online newsletter, MReport:
“…the Urban Institute (UI) issued a report finding that, based on the latest numbers, Ginnie’s book of business is now at $1.5 trillion—a rate of growth that has tripled over the last seven years.
What this means is that at its current rate of growth, Ginnie Mae will soon surpass Freddie Mac as the silver medalist in the single-family mortgage securitization platform game, behind Fannie Mae.
… In the recession’s wake, the share of loans insured by the government increased rapidly. Accordingly, Ginnie’s single-family securitization sector (its largest) grew at a much faster pace than the GSEs.
If Ginnie keeps growing at its current pace, it will overtake Freddie Mac within a year as the second largest single-family securitization platform, the report stated.
Without Ginnie and its full-faith and credit guarantee, UI reported, ‘the government insurance programs could not have played such a critical counter-cyclical role and the downturn in home prices would have been much more severe.’
The sentiments are not mere PR and not at all new. Back in 2009, when the recession was burrowing deeper, the Wall Street Journal predicted that FHA and Ginnie would overtake the GSEs. The Journal’s growth predictions, it turned out, were incredibly accurate as well. As for when Ginnie will surpass Fannie, no one is yet sure. But it no longer seems out of the question to think it will happen before too long.”
The Take-Away. As goes the housing market, so goes the economy. Unfortunately, poor employment numbers continue to act as a drag on growth, confidence, and ultimately the decision to purchase a home. But had it not been for Ginnie, there is little question that the Great Recession would have been even deeper and longer.
So the little sister is maturing, thriving, and coming into her own! While Fannie and Freddie teetered on the brink of collapse in 2008, Ginnie quietly filled the void, providing housing opportunities to folks who would never have had the opportunity.
On an interesting note, during the easy money days of 2005 – 2007/8, one could get a loan for 100% of a home’s price. There was not much comparison shopping in those days, and since underwriting was tossed out the window, most borrowers went to lenders who were selling their paper into the private label market. They didn’t need the flexible down payment terms of FHA (3.5%) for example, since they could get in for nothing down. The result is that the government insured programs such as FHA languished. That reversed dramatically when cracks began to appear in the private secondary market in 3Q 2007 and thereafter. For more on this, see Philadelphia Fed article here. ~PCQ
[1] “Government Sponsored Enterprises,” so named because even though they were publicly traded corporations, they were created by the federal government. As a result, they were viewed as having the “implicit” guarantee of the government. In other words, they were believed to be ‘too big to fail’ – which turned out to be correct in 2008, when the federal government took them over, rather than permitting them to collapse.
[2] Ginnie was born in 1968. She was christened the “Government National Mortgage Association” – and from her infancy known as “Ginnie Mae.” She is a wholly-owned government corporation within the U.S. Department of Housing and Urban Development (HUD).
[3] That is, loans that are not guaranteed by the federal government.
[4] The result of paying less than interest-only was that the principal balance increased, since the deferred interest was added on top of it. As risky as this sounded, unscrupulous mortgage brokers convinced people that if the scheme didn’t work, they could always sell their home for a sum of money that repaid the neg-am loan and reaped a handsome profit. That approach worked, if at all, if prices continued to rise exponentially.
[5] When the private label market collapsed, investors ended up holding billions of dollars of worthless paper, since the bulk of the mortgages were secured by homes that had been foreclosed or were abandoned.
| While Fannie Mae and Freddie Mac, the two GSEs[1] who’ve received the most attention of late – and much of it bad, after being taken over by the feds in October 2008 – their forgotten sister, Ginnie Mae,[2] has been quietly growing into a strong young woman – metaphorically speaking.As opposed to Fannie and Freddie, who served as purchasers of conventional loans[3] in the “secondary mortgage market,” Ginnie only purchases government-backed loans through the FHA, VA, and Department of Agriculture.The secondary mortgage market does not originate mortgage loans. Rather, it purchases them from the original lenders, i.e., those that fund loans upon the closing of a home purchase. Once the lender takes back the note and mortgage [called a “trust deed” in Oregon] from the borrower, it sells the “paper” to a purchaser in the secondary market, thereby receiving back money to make more loans. The purchaser in the secondary market, e.g. Fannie or Freddie, aggregates millions of dollars of these loans and turns them into securitized bonds [i.e. streams of income flowing from the borrowers’ mortgage payments], and sells them to large investors, such as pension funds and municipalities.And for those who may not fully appreciate it, let me put a fine point on Ginnie’s important following the credit and housing crisis: During the 2000s, Fannie and Freddie only purchased loans from lenders whose underwriting conformed to their guidelines [these were known as “conforming loans”]. Their guidelines dictated to the banks the credit criteria required of borrowers in order for the GSEs to purchase the loans. The result was that many folks who had poor or sketchy credit did not qualify for conventional financing, i.e. loans that would be sold to the GSEs. No loan, no home.Then along came the “private label secondary market” and everything changed. The private label second market served the same function as Fannie and Freddie, with one major exception; it had far lower credit and underwriting standards than the GSEs. As a result, banks could now make loans to people with little or no credit, and in order to make the payments affordable, developed repayment programs that were interest only – and sometimes even less than interest only – called “negatively amortizing loans” or “neg-ams.”[4]
And for those folks who had no down payment, they were given a higher interest rate second loan, thus issuing in the use of “piggy-back” loans consisting of an 80% first mortgage and a 20% second. Again, the sales pitch was that if you couldn’t afford the payments, you could always sell the home and make a nice profit.
Thus, the impact of the private label market meant that now there was a resource for the banks to sell their toxic paper to, i.e. investors chasing higher rates of returns. And the big credit rating agencies, S&P, Moody’s and Fitch, gave “investment grade” ratings to these bundled loans, thus attracting large pension fund money. When the financial crisis hit, the private label market dried up almost overnight. It does not exist to any measurable degree today.
As a result of the tighter post-crisis underwriting standards of today’s lenders, there are many would-be borrowers who cannot qualify for loans. These are not the scammers and flippers of times past, but legitimate working families who want to purchase a home. Enter Ginnie Mae.
Like her better known siblings, Ginnie Mae does not make loans; it acts as a secondary market purchaser of loans from banks. As noted above, it purchases paper from banks that have made purchase money loans through the FHA, VA, and USDA. Then it bundles those loans and sells them to investors, guaranteeing the timely payment of principal and interest. Ginnie Mae securities are the only mortgage backed securities to expressly carry the full faith and credit guaranty of the United States government. This makes it an attractive and safe investment.[5]
Fannie and Freddie’s higher underwriting requirements have had the effect of freezing many potential buyers out of today’s housing market. The result has been that the FHA, VA, and USDA, have become the de facto market for subprime loans. The reason is because these three programs have lower underwriting and down payment requirements. Thus, they have become the primary source of money for folks locked out of the conventional lending market. |
[1] “Government Sponsored Enterprises,” so named because even though they were publicly traded corporations, they were created by the federal government. As a result, they were viewed as having the “implicit” guarantee of the government. In other words, they were believed to be ‘too big to fail’ – which turned out to be correct in 2008, when the federal government took them over, rather than permitting them to collapse.
[2] Ginnie was born in 1968. She was christened the “Government National Mortgage Association” – and from her infancy known as “Ginnie Mae.” She is a wholly-owned government corporation within the U.S. Department of Housing and Urban Development (HUD).
[3] That is, loans that are not guaranteed by the federal government.
[4] The result of paying less than interest-only was that the principal balance increased, since the deferred interest was added on top of it. As risky as this sounded, unscrupulous mortgage brokers convinced people that if the scheme didn’t work, they could always sell their home for a sum of money that repaid the neg-am loan and reaped a handsome profit. That approach worked, if at all, if prices continued to rise exponentially.
[5] When the private label market collapsed, investors ended up holding billions of dollars of worthless paper, since the bulk of the mortgages were secured by homes that had been foreclosed or were abandoned.
So how’s Ginnie doing today to meet the demand? Quite well, thank you. According to a recent article in the online newsletter, MReport:
“…the Urban Institute (UI) issued a report finding that, based on the latest numbers, Ginnie’s book of business is now at $1.5 trillion—a rate of growth that has tripled over the last seven years.
What this means is that at its current rate of growth, Ginnie Mae will soon surpass Freddie Mac as the silver medalist in the single-family mortgage securitization platform game, behind Fannie Mae.
… In the recession’s wake, the share of loans insured by the government increased rapidly. Accordingly, Ginnie’s single-family securitization sector (its largest) grew at a much faster pace than the GSEs.
If Ginnie keeps growing at its current pace, it will overtake Freddie Mac within a year as the second largest single-family securitization platform, the report stated.
Without Ginnie and its full-faith and credit guarantee, UI reported, ‘the government insurance programs could not have played such a critical counter-cyclical role and the downturn in home prices would have been much more severe.’
The sentiments are not mere PR and not at all new. Back in 2009, when the recession was burrowing deeper, the Wall Street Journal predicted that FHA and Ginnie would overtake the GSEs. The Journal’s growth predictions, it turned out, were incredibly accurate as well. As for when Ginnie will surpass Fannie, no one is yet sure. But it no longer seems out of the question to think it will happen before too long.”
The Take-Away. As goes the housing market, so goes the economy. Unfortunately, poor employment numbers continue to act as a drag on growth, confidence, and ultimately the decision to purchase a home. But had it not been for Ginnie, there is little question that the Great Recession would have been even deeper and longer.
So the little sister is maturing, thriving, and coming into her own! While Fannie and Freddie teetered on the brink of collapse in 2008, Ginnie quietly filled the void, providing housing opportunities to folks who would never have had the opportunity.
On an interesting note, during the easy money days of 2005 – 2007/8, one could get a loan for 100% of a home’s price. There was not much comparison shopping in those days, and since underwriting was tossed out the window, most borrowers went to lenders who were selling their paper into the private label market. They didn’t need the flexible down payment terms of FHA (3.5%) for example, since they could get in for nothing down. The result is that the government insured programs such as FHA languished. That reversed dramatically when cracks began to appear in the private secondary market in 3Q 2007 and thereafter. For more on this, see Philadelphia Fed article here.
[1] “Government Sponsored Enterprises,” so named because even though they were publicly traded corporations, they were created by the federal government. As a result, they were viewed as having the “implicit” guarantee of the government. In other words, they were believed to be ‘too big to fail’ – which turned out to be correct in 2008, when the federal government took them over, rather than permitting them to collapse.
[2] Ginnie was born in 1968. She was christened the “Government National Mortgage Association” – and from her infancy known as “Ginnie Mae.” She is a wholly-owned government corporation within the U.S. Department of Housing and Urban Development (HUD).
[3] That is, loans that are not guaranteed by the federal government.
[4] The result of paying less than interest-only was that the principal balance increased, since the deferred interest was added on top of it. As risky as this sounded, unscrupulous mortgage brokers convinced people that if the scheme didn’t work, they could always sell their home for a sum of money that repaid the neg-am loan and reaped a handsome profit. That approach worked, if at all, if prices continued to rise exponentially.
[5] When the private label market collapsed, investors ended up holding billions of dollars of worthless paper, since the bulk of the mortgages were secured by homes that had been foreclosed or were abandoned.
