Ginnie Mae's Sam Valverde on tackling liquidity hurdles

June 5, 2024 10:49 PM

Ginnie Mae has been able to provide continuity on several key initiatives since Sam Valverde stepped in as acting president last month, and he says those aimed at sustaining mortgage liquidity will be the agency's top priority as it moves forward.

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This includes steps that may counter interest-rate related cash-flow strains on the growing number of nonbanks it works with, so that these mortgage-backed securities issuers can keep supporting the MBS that Ginnie guarantees, a key source of funding for government loans.

In an interview about what's on Ginnie's agenda for the future, Valverde touched on the recent flexibility added for extended term MBS to that end, and discussed broader ways it's supporting independent mortgage banks that lack some liquidity resources depositories have.

He also explained how identifying aspects of Ginnie's existing MBS that might appeal to investors interested in bonds with environmental, social and governance criteria could expand buyer interest in a market that's lost a key investor as the Federal Reserve has pulled back.

Another potentially liquidity-boosting initiative Valverde weighed in on was how one of the legislative concepts discussed in a recent Financial Stability Oversight Council study could work: an expansion of its pandemic-era Pass Through Assistance Program.

A condensed version of his responses to questions from this publication follows.

What do you see as Ginnie Mae's priorities going forward?

What I'm really focused on is issuer liquidity. We've been focused on that for the entire time that I've been here and it remains critical.

We've made great strides in the market. We're well beyond the rapid tightening in interest rates. That was causing a lot of concerning dislocations in various parts of the financial markets. While we're now in a more stable rate environment, it's an elevated rate environment, and that's tough on borrowers, households and housing finance institutions. So we're going to continue to work on trying to return working capital to issuers through programmatic adjustments.

I think the part that we really are trying to communicate is a direct-through line between access to credit for issuers and having their liquidity needs met, and meeting the needs of borrowers by putting them in their first home or supporting them during times of economic stress through loss mitigation efforts. Liquidity is critical for all of that and I think that that's an important conversation that we need to have now while the interest rate environment is stable. We've been in this higher rate environment for a long time and the reserves that the COVID refi boom brought to our counterparty base have largely been exhausted.

Each day we're in this higher for longer environment, the greater potential risk there is for something to break. So it's really critical that we continue to raise awareness of the need to support the liquidity benefit of government mortgages for borrowers. We'll also continue to work on trying to identify places where we can make program changes. We're focused on both the reverse mortgage sector and the forward mortgage sector, which is much larger.

We just made a small change that we think is helpful. We're going to allow for extended term MBS to be pooled into Platinum securities, and there's a series of changes designed to drive liquidity back to issuers in this challenging environment. It is going to be a key priority for a while.

Also, Ginnie Mae is a really powerful engine for social change and we haven't historically talked about it that way, despite that it's been at work this entire time. So for over 50 years, we've built this really large, liquid multi-trillion-dollar market based almost entirely on our financial performance and the whole time we've been supporting this huge plurality of first-time homeownership. It's my priority to tell this directly in the markets way that hopefully incentivizes investors to buy more mortgage-backed securities. Ideally, over time, that will improve execution and create more savings for borrowers.

One thing we know in the capital markets is borrowers we serve actually have a unique value proposition for investors. So trying to identify who we serve by income is important. Roughly 40% of our portfolio right now represents first time homebuyers, nearly 30% consists of low- to moderate- income borrowers. Those metrics reveal value for investors.

On the social MBS, is there a sense of what types of benefits from them might be possible, or is it too early to say?

There's a difference in how we approach this work compared to the GSEs. At Ginnie Mae, we're not an issuer ourselves. Our general ESG program is focused on our portfolio. That portfolio isn't changing. Our ESG program is really around additional disclosures. We are not creating a separate product. So we aren't looking for a pay-up. I think, candidly, pursuing a social premium is challenging. I think those who are trying to do that find it challenging.

For us, we're really focused on trying to create new demand in a world in which the Fed is not buying these securities and any attempt to continue to increase security liquidity by increasing demand for those securities is helpful

We're really focused on uncovering the inherent social impact of our flagship products so that the world can understand that there is discernible, verifiable affordability impact for low- to moderate-income borrowers in that program as a bid to increase demand for those securities, which will also eventually increase potential savings for borrowers. Our goal here really is to identify who needs to be served so that those with a social impact mandate or interest understand that there is a discrete source of that collateral in a highly liquid product that is also fully guaranteed by the federal government.

So potential pay-ups aren’t the goal, it’s more about the depth of the investor base?

And liquidity, which ultimately will bring benefits to borrowers. Our near term objective is not to search for a premium. I think that would take a long time, and would suggest an alternative sort of individual product. We're really focused on identifying the impact of our existing program. We're going to say to our investors, if you're interested in a liquid product and you don't want to give up yield, you're already buying social bonds from Ginnie Mae. We're just now giving you the disclosures needed to make an assessment for yourself.

Do you have a sense of how much potential there is to expand investment?

We discuss our social disclosure program with every investor we meet and it's generally been received incredibly well because it's just additional information. It's too soon to tell sort of whether it's really materially increasing demand. It often takes the markets some time to make those kinds of assessments. At this point the program is still really new, but we're going to continue advocating for it and driving awareness.

Along the lines of discussion about ways to improve liquidity, what about this idea for an expanded PTAP facility? It was recently brought up in the FSOC report and Ginnie Mae has mentioned it previously. How possible is it?

Ginnie was a principal contributor to the report. We really leveraged a lot of our own expertise and experience dealing with our counterparties, largely IMBs, helping to collaborate and get that report completed. We're excited that it's out in the world, and I think that as a problem statement, it's a really elegant, succinct way of describing some of the issues that Ginnie has been raising for well over a decade now.

What I've said before is we have a structural issue. IMBs are part of the servicing reform revolution, they've met government borrowers where they are and they're adroit at serving them. They've used technology well, to increase access to credit.

At the same time, they're monolines. That singular focus drives significant benefits, but it also means that they don't have the varied business that a bank has and that sort of operates as a natural hedge for the housing work that a bank might do. They don't have the same access to liquidity tools that depository institutions have. So that's a significant structural issue that's been the case ever since IMBs have become dominant.

But those issues are remediable and I think the FSOC report both articulates the problem very well from a risk perspective, and then articulates a set of solutions that, working together, can solve this problem.

I think it's really important to think about the FSOC report as starting a conversation. It reflects ideas that we want public discussion to develop around and one of those items is called the PTAP-plus.

Our legislative recommendation is that PTAP be augmented by allowing authority at Ginnie Mae to also advance taxes and insurance. That would make the COVID PTAP program significantly more powerful. It's a role for the government to play in liquidity for our issuers.

So PTAP-plus is a solution. It is legislative, though. So we'll be happy here to work on technical assistance for any bill.

We also think it's important to think about those problems holistically. We'd love to see a public conversation around these issues that really ties issuer and servicer liquidity to access to credit, and to the sustainability of that credit through loss mitigation.

That liquidity is the lifeblood of the housing finance system. Ginnie Mae cannot make an MBS on its own. We need our counterparties to do that. If we want them to continue doing that work across economic cycles, we need to both establish additional authorities at Ginnie Mae and FHFA to help provide oversight and elaborate new liquidity tools that could make business sustainable, not just because we're worried about potential systemic risk, but also because access to credit demands that.