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The Journal of Structured Finance

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COVID-19 Highlights the Need for Servicer Access to a Government-Backed Liquidity Facility

Laurie S. Goodman, Karan Kaul and Ted Tozer
The Journal of Structured Finance Fall 2020, 26 (3) 29-40; DOI: https://doi.org/10.3905/jsf.2020.1.111
Laurie S. Goodman
is the co-director of the Housing Finance Policy Center at the Urban Institute in Washington, DC
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Karan Kaul
is a senior research associate at the Housing Finance Policy Center at the Urban Institute in Washington, DC
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Ted Tozer
is a senior fellow at the Milken Institute’s Center for Financial Markets in Washington, DC
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Abstract

The fundamental differences between the structure of the market for government mortgages, pooled into Ginnie Mae securities, and the market for government sponsored enterprises (GSE) mortgages are at the heart of the constraints that impact the servicing of government loans. This is exacerbated by the higher-risk profile of Ginnie Mae borrowers and heavy concentration of non-banks in the Ginnie space. The pandemic and the subsequent passage of the CARES Act demonstrated the need for a federal liquidity facility for non-banks. This is a more pressing issue in the Ginnie Mae market, with potential systemic implications for the mortgage market.

This article explains these issues in detail, concludes that a federal liquidity for non-banks is necessary, and discusses two options, one for the current crisis and another for the future: a COVID-19 liquidity facility at the Federal Reserve, and in the long run, federal home loan Bank (FHLB) membership for non-banks to allow for access to FHLB advances.

TOPICS: Real estate, MBS and residential mortgage loans, financial crises and financial market history

Key Findings

  • • Due to differences in market structures, servicing Ginnie Mae mortgages puts more strain on servicers than servicing GSE mortgages.

  • • The Ginnie Mae segment is exposed to both a higher-risk borrower profile and a much larger concentration of non-banks, which have no source of government liquidity.

  • • There is a need for a government-backed liquidity facility for non-banks.

  • © 2020 Urban Institute. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Structured Finance: 26 (3)
The Journal of Structured Finance
Vol. 26, Issue 3
Fall 2020
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COVID-19 Highlights the Need for Servicer Access to a Government-Backed Liquidity Facility
Laurie S. Goodman, Karan Kaul, Ted Tozer
The Journal of Structured Finance Oct 2020, 26 (3) 29-40; DOI: 10.3905/jsf.2020.1.111

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COVID-19 Highlights the Need for Servicer Access to a Government-Backed Liquidity Facility
Laurie S. Goodman, Karan Kaul, Ted Tozer
The Journal of Structured Finance Oct 2020, 26 (3) 29-40; DOI: 10.3905/jsf.2020.1.111
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  • Article
    • Abstract
    • WHAT CAN CAUSE LIQUIDITY STRESS FOR MORTGAGE SERVICERS?
    • DIFFERENCES BETWEEN GINNIE MAE’S AND THE GSES’ ROLE IN THE MORTGAGE MARKET
    • THE GINNIE MAE MARKET IS AT MUCH GREATER RISK THAN THE GSE MARKET
    • GSE AND GINNIE MAE ACTIONS TO ADDRESS SERVICER LIQUIDITY NEEDS DURING COVID-19
    • CAN FHA, VA, AND RHS COVER ADVANCES FOR SERVICERS OF GOVERNMENT LOANS?
    • BORROWING AGAINST SERVICING RIGHTS IS CONSTRAINED IN A CRISIS; BORROWING AGAINST GINNIE MAE SERVICING RIGHTS IS EVEN MORE DIFFICULT
    • THE LACK OF A STABLE SOURCE OF SERVICER LIQUIDITY CAN GENERATE SYSTEMIC RISK
    • GIVEN THESE CONSTRAINTS, HOW CAN WE ENSURE SERVICER LIQUIDITY DURING COVID-19 AND BEYOND?
    • SHORT-TERM SOLUTION: A FEDERAL RESERVE COVID-19 LIQUIDITY FACILITY
    • LONG-TERM SOLUTION: NON-BANK MEMBERSHIP IN THE FEDERAL HOME LOAN BANK SYSTEM
    • CONCLUSION
    • ADDITIONAL READING
    • REFERENCES
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