The servicing risks that keep federal officials up at night

The pandemic led to innovations that positioned the servicing market to survive similar crises, but the next one will be different, federal officials said at a recent meeting.

For Ginnie Mae, a government guarantor for securitizations of affordable-housing loans that other agencies like the Federal Housing Administration back, one key concern is a small-scale turn in the economy affecting government mortgage borrowers, acting President Sam Valverde said at the Mortgage Market Resilience and Access to Credit Summit Tuesday.

"Somewhat counterintuitively, I'm less worried about a large downturn," he said, noting that a mild recession that affects service workers or other government mortgage borrowers could be a bigger challenge.

Given recent mixed signals about the state of the economy, questions are percolating about whether monetary policymakers would intervene and how they might do so.

While policy intervention during the pandemic did allay some servicer concerns, measures taken in a future crisis may not be as effective at reducing advancing risk, considering that a large number of outstanding loans have very low rates, Ted Tozer, a former Ginnie Mae president, noted during the conference. The pandemic was somewhat unique in that low interest rates had spurred rampant refinancing, which returned cash to mortgage firms. 

"The Fed has no ammunition left," Tozer said.

Refinancing also can be a mixed blessing, as mortgage prepayments can be a risk for MBS investors.

While mitigated in part by the outstanding loan mix, it's a risk Ginnie officials have been keeping an eye on as technological developments have allowed mortgage companies and borrowers to react quickly to small changes in rate. 

It's tricky to strike the right balance between managing prepayment and advancing risk while forbearance is at play. But the pandemic showed payment suspensions were an effective tool that can be used in future crises, officials indicated.

"There was a moment at FHA where our delinquency rate was close to 12%. That could have ended badly and it did not," Commissioner Julia Gordon said at the Mortgage Market Resilience and Access to Credit Summit.

However, the next challenge the market faces will be different, said David Dworkin, president and the CEO of National Housing Conference, who moderated one of the panels at the summit.

"We're always great at planning for the crisis we just had, not so much for the crisis we're about to have," he said.