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

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: Financial crises and financial market history, MBS and residential mortgage loans, real estate

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.