Ginnie Mae Is Looking for a Few Good Subservicers

Ginnie Mae often has its hands full with an abundance of issuers, but there's one type of counterparty it would welcome more of: subservicers.

"We're trying to develop as many competent subservicers as we can for the industry," said Leslie Meaux, a director of monitoring and asset management in Ginnie's office of issuer and portfolio management. "We certainly want to work cooperatively with [them]. They are a strong asset...for our program."

Subservicers' influence at Ginnie has grown as nonbanks, which increasingly have displaced banks as issuers, are farming out more of their work to third parties, she said.

While Ginnie has a few hundred active issuers, it only has roughly 20 subservicers, and just a few among that group carry most of its load.

"Some of those subservicers have a lot of issuers, so there are a lot of issuers per subservicer and that presents some level of concentration risk," Meaux said.

Subservicers as of last fall were handling roughly one-third of Ginnie's remaining principal balances on its securities, and the top four were responsible for a little over 20% of the agency's total RPB as well as 65% of its subserviced RPB.

Meaux declined to name any top subservicers, noting that Ginnie is trying to get a better understanding of each subservicer's exposure without having to piece together the data from issuers. One option would be to establish something resembling an operational performance profile for each subservicer.

LoanCare in Virginia Beach, Va., Cenlar in Ewing, N.J., and the Lake Zurich, Ill.-based Dovenmuehle are likely among top Ginnie Mae subservicers, according to industry sources and past subservicing rankings across product lines. None of these three companies responded to calls for comment.

Whoever the major players are, they may welcome some help given the increased demand for their services, observers said.

"There's been a lot of growth in the subservicing business," said Rudy Zabran, a managing director at Opus Capital Markets Consultants, a Wipro Ltd. quality-control subsidiary based in Lincolnshire, Ill., that offers operational risk assessments of servicing entities.

One catalyst has been servicing-rights trading, said Michael Dubeck, chief executive of Planet Financial Group and Planet Home Lending in Clearwater, Fla.

Buyers need to be approved as Ginnie issuers to invest in servicing rights, but they do not always have the operational resources to handle actual servicing, so they outsource, said Dubeck, whose company is a Ginnie Mae issuer and subservicer.

"We're talking about the hedge fund that raises money and outsources everything," he said.

Increasingly detail-oriented regulatory duties passed on by clients are another reason large Ginnie Mae subservicers would likely welcome another sizable player in their market, said Joseph Murin, a former Ginnie chairman.

"I think there's plenty of business to go around right now," said Murin, who is chairman of JJAM Financial LLC, an investment consulting firm in Pittsburgh.

Subservicers have to go through the same approval process as issuers, and many of them also have their own portfolios. Like issuers, they are expected to do a certain amount of work with Ginnie Mae product in order to maintain their approvals. Reviews include office visits.

"We can be at both the subservicer's shop and the issuer's shop, but because the subservicer has all the subservicing data, we're usually in the subservicing shop doing these reviews," Meaux said.

Ginnie has been showing interest in more closely examining its issuers' oversight of subservicers at least as far back as early 2015 and anticipates the efforts will take some time.

How long it takes may depend on part on funding, which Ginnie is unlikely to get more of. Ginnie's initial request for a budget increase was turned down this year.

"I'm sure [Ginnie Mae President] Ted [Tozer] made the [budget] request for a reason and for a very good one. It's just, unfortunately, so did a lot of other agencies," said former Federal Housing Administration commissioner Brian Montgomery, vice chairman of Washington, D.C.-based consulting firm The Collingwood Group.

Getting a budget request approved isn't easy, even when the need is clear, Murin said.

"I will tell you in 2008-2009, when I was in office, we couldn’t get any funding to increase our staff during a very critical time," he said.

Concentration risk has in the past been a real concern at Ginnie, which insures government mortgage bonds. It issued a default notice for its eighth largest-issuer near the end of the last recession.

While Ginnie is interested in doing more to monitor subservicing risk, issuers ultimately remain responsible for their third parties' actions.

"The bottom line for the Ginnie Mae program is that you can use a subservicer in our program, absolutely," Meaux said. "But at the end of the day, the issuer remains the accountable party to Ginnie Mae on the servicing of their Ginnie Mae portfolio."

Ginnie does not have to approve the use of a subservicer, but it does have to approve the particular subservicer used, and subservicers' actions do not always jibe with what issuers want or Ginnie demands, he said. This fact has interfered with some servicing-rights transactions, Dubeck said.

Despite this, Dubeck thinks his company Planet can offer effective subservicing because, although it is not as big as leading subservicers, it is among other things a lender with multiple loan channels and has a bigger operation than some other servicing-rights investors in the market.

"When I got hired I said, 'Look, if we are going to buy mortgage servicing rights, you better know how to hold onto them,'" he said.