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.

We explain these issues in detail and conclude that a federal liquidity for non-banks is necessary, and discuss 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.