Agency president discusses how nonbank lenders have taken a leading role in issuing Ginnie Mae securities.
Mortgage Banking
July 2015
By Robert Stowe England
Since Ted Tozer took the helm as president of Ginnie Mae in February 2010, he has witnessed a sweeping transition in the mortgage market--from one dominated by large banks to one dominated by non-bank independent mortgage bankers.
Prior to coming to Ginnie Mae, Tozer served for 20 years as senior vice president of capital markets at the National City Mortgage Company, which is based in Cleveland, Ohio, and was acquired by Pittsburgh-based PNC Financial Services in 2008. At National City his responsibilities included pipeline hedging, pricing, loan sales, loan delivery and credit guideline exceptions.
From 1986 to 1989, Tozer was vice president and chief financial officer of BancOhio National Bank, based in Cleveland, Ohio, where he was in charge of overseeing loan delivery, pipeline hedging, pricing, corporate accounting, servicing investor reporting and product development. From 1979 to 1986, he served at BancOhio as vice president and investment operations manager, and was responsible for all operational support functions of the bank’s bond portfolio and securities dealer.
From 2002 to 2004, Tozer served as chairman of the Mortgage Bankers Association’s (MBA’s) Capital Markets Committee. While chairman, he successfully worked with Ginnie Mae to change the structure of the Ginnie Mae II security.
Tozer has a Bachelor of Science degree in accounting and finance from Indiana University. He became a certified public accountant in 1980 and a certified management accountant in 1984. Mortgage Banking caught up with him recently at his office in Washington, D.C.
Q: There is a broad shift in the mortgage origination market toward non-banks. This seems to be more pronounced when you look at the composition of issuers of Ginnie Mae securities.
A: Correct. If you turn the clock back four years, about 18 percent of our guaranteed securities were put together by non-banks. Right now around 65 percent of our securities we’re guaranteeing are from non-banks. So, it’s a pretty dramatic change. For bank originations, we’ve gone from 82 percent down to the mid-30 percent range. So it’s a pretty pronounced shift. Most of the shift has occurred in the last 18 months.
Q: What’s driving it?
A: About 15 years ago, banks tended to do mortgages as a way to obtain bank customers and to support their retail-banking sector. But what happened during the 2000s is that because of economies of scale, banks started building servicing as a profit center. And I think what’s happened now is that banks have gone back to the original model of really supporting the retail bank operation, and it’s not so much the case of just acquiring servicing for servicing’s sake.
Banks have all these other areas of the organization where they can make money--car loans, credit cards and so on. They are shifting their capital to areas that are more profitable than the mortgage banking side.
On the non-bank side, these are monoline businesses that have built their models around this low-margin business because they don’t have any other product and they’re specializing in mortgages. Because of that specialization, they are able to do business a little bit cheaper than . . . the banks.
So what you’re seeing, I think, is a kind of back to the future--where banks are going back to be supporting their retail banks while non-depositories are filling in the void. Because of Basel III [bank capital standards limiting mortgage-servicing rights (MSRs) to 10 percent of Tier 1 capital] and other regulatory issues, the small and medium-sized banks don’t have the balance sheet to hold a lot of MSRs. So I think the non-banks are filling in, where historically the small banks would have stepped in to hold servicing. But now they’re limited because of that regulatory capital.
Q: So these operating pressures are hitting the small bank sector, too?
A: Yes. They’ve got issues with Basel III as well, and they also have a higher cost of originating a loan because they don’t do many loans. And they are facing the cost of the regulations put into place by the Consumer Financial Protection Bureau [CFPB]. But that’s the reason the non-depositories are so critical. The non-banks are critical to keeping the capital flowing and they’ve covered that differential lost by the banks.
Like, for example, back to 2011, Wells Fargo, Bank of America and Chase were well over 50 percent of our business. Now those three are down to somewhere in the mid-20s. Who else could have picked up the difference if it hadn’t been for the non-banks?
Q: The banks are also putting credit overlays on all these loans above and beyond the underwriting requirements, aren’t they?
A: Right. And they’re mainly doing so because they still have a third-party channel and they are not seeing these borrowers as a way to get more retail customers. By increasing credit overlays, they’re saying if they are really good-quality loans coming through the third-party channel that are really low-cost to service, we’ll take them. But they really don’t want to get into it in a big way. So they are using credit overlays as a way to slow down the volume.
That’s why I think it’s really critical that the non-banks are coming in now. Most of them are relatively new startups, so they don’t have a lot of legacy issues. They’re able to build state-of-the-art systems. They are able to start out with a clean slate and start to build a platform knowing what we know today, whereas most of the banks are having to deal with legacy platforms that were not built for what we know today.
Q: So the non-banks have better technology?
A: Yes. They use technology to give good customer service at a lower cost. They can leverage technology to enable them to meet the requirements of the CFPB and others, whereas a lot of the banks have to shoehorn a lot of those requirements into their current systems that really weren’t designed for them. A lot of people wonder about the non-banks and their commitment to consumers, but look at Quicken [Loans, Detroit]. J.D. Power [and Associates] has ranked Quicken the highest in customer satisfaction for mortgage origination for five years in a row.
Q: Quicken appears to be dedicated to improving the mortgage origination process.
A: Yes, but so are a lot of non-banks. These businesses know that the only way you can continue to do well is to have repeat customers and so forth. At the end of the day, this shift to non-banks overall is a huge home run for the consumer and housing industry in general. With banks pulling back and non-banks coming in, it has made it seamless to the average consumer and given them a choice without the credit overlays. If all of a sudden a bank puts on a credit overlay, then there’s somebody down the street, another competitor, who’s dealing with us directly who won’t put the overlay on. So it’s really made the transition very, very seamless for consumers and for the housing industry in general.
Q: From your vantage point, you can see the sharp reductions in Federal Housing Administration [FHA] lending by the big banks, such as JPMorgan Chase, whose chairman and chief executive officer, Jamie Dimon, said he did not see how the bank could make money on FHA loans.
A: Exactly. Exactly. And I attribute that a lot to the fact that they just don’t have the systems and infrastructure they need to work aggressively with the consumer when they get into default. So it has been a very costly, manual process for a lot of the legacy lenders.
Q: Hasn’t it also helped the non-banks that there have been several refi waves?
A: That’s exactly what happened when FHA dropped its premiums early this year. But even when the premium was higher, we had a refinance boom just because the Fed was dropping interest rates in the last couple of years. So, yes, a lot of these companies and non-depositories came into being in the last couple of years and took advantage of the tremendous rate drop by the Fed. Even though FHA had raised premiums dramatically, the Fed had dropped interest rates by 300 basis points or so. That more than compensated for the higher premium.
So a lot of these companies basically took market share away from the big banks. [Borrowers who refinanced their loans essentially] paid off the servicing from someone like Bank of America. [Then] they ended up with this new non-bank picking up the servicing by actually refinancing them away from the big banks.
Q: So, in effect, this has been accelerating the sectoral transition to the non-banks?
A: That’s how Quicken grew. Quicken basically has only been working with us for three or four years. Prior to that they were a correspondent of Bank of America. Then they came to us directly. They got underneath all the credit overlays of Bank of America and they built their whole servicing portfolio just in the last couple of years. With their telemarketing programs, Quicken has been able to get borrowers to refinance their loans from wherever they were currently, whether with Bank of America, Chase or whoever.
Q: It’s phenomenal how all these parts of the mortgage system are seeing sweeping changes to allow the huge shift that is taking place. Of course, Ginnie Mae always had its common security. This is not new. It just made it easier to make the transition.
A: Exactly. We’ve always had a common security. [W]e were never in a situation with this major kind of transition, and [yet] the common security has just facilitated it. It’s amazing how our model proved to be so flexible that we didn’t have to do anything to change it, and it facilitated this transition on its own because of its ability to support the industry through all different economic cycles. I think a lot of people just don’t realize how well our model worked during the last couple of years to cue the whole transition of the mortgage market that’s occurred.
Q: Do you think the transition is going to continue or have we reached a new equilibrium?
A: For me, I think the non-banks are probably going to continue to be a large player for us. If you look back, the big guys--the Chases and Bank of Americas of the world--they tended to do a lot of FHA and VA, or they bought them through the correspondent channel. But if you went down to the community banks and the medium-sized banks, most of them tended to focus on conventional mortgages for Fannie Mae and Freddie Mac.
Because of that, I think you’re going to continue to see our business be non-bank-driven as the big banks continue to wind down their correspondent operations. Because of the conventional slant of the medium to small banks, I think you’re probably going to see them continue to focus on conventional lending because that’s more their natural fit in the marketplace.
Q: It appears that overall, small banks are holding their market share in originations, while it’s the big banks that are losing market share. What does this do for the mortgage industry? Is it a good thing?
A: I think it’s a wonderful thing. For us at Ginnie Mae, we’re in an FDIC-type situation where if any issuer gets into financial trouble, what we will do is take their loans and their MBS securities and take their MBS obligations and move them to another issuer in a way similar to the way the Federal Deposit Insurance Corporation takes deposits and moves them to another bank. If we’re able to keep them bite-size, where nobody has more than, say, 4 [percent] or 5 percent market share, then it makes the movement of those assets so much easier and so much less costly to the taxpayer than if it were somebody who has 20 [percent] to 30 percent market share and you’re going to have to break it up into who knows how many pieces to get anybody to absorb it.
It makes it easier to deal with issuers when they get into trouble. So everybody wins. The taxpayer wins because our guarantee is not put at risk. The consumer wins because there’s more competition for the consumer. And I think the housing market itself does well, too, because again it’s a situation where it’s a free flow of capital and it really keeps the capital coming into the housing market.
Q: What sort of challenges does it present for Ginnie Mae to oversee such a monumental shift in the makeup of the mortgage market?
A: The key challenge for us is liquidity for the non-banks. Liquidity is really critical for our issuers because they are required to make debt-service payments to their bond holders, whether their underlying loans are current or not. So it can take a lot of cash. It can take up to six months to foreclose. So cash is a big issue.
Our concern with the depositories is that, by definition, they have plenty of cash because they’ve got CDs [certificates of deposit], deposits, all this money they have to fund their advances. For the non-depository, the big challenge we have is to make sure they have plenty of cash.
That’s the reason we’ve asked Congress for more money--because I need a bigger staff to work with these issuers to make sure that they do have balance sheets that have enough liquidity there to enable them to go through any kind of stress scenario without cash.
The biggest challenge we have is educating people on the fact that our oversight is going to be required to change to some degree. Now, for example, we have to look at the sale agreement that non-bank acquirers of MSR have with banks for loans and the lines of credit. We have to make sure that if we get to a point where the Fed starts tightening credit and banks start pulling their credit lines back, we don’t want to have issuers left in a tough position where they might not be able to make their debt service every month.
Right now our budget request is on Capitol Hill. We’ve asked for $20 million, and the basis for that is to build up the infrastructure we need to deal with this new type of issuer. It’s not that there’s anything wrong with them. It’s just that it’s a new type. We need to have the infrastructure built [and] in place to make sure we can get ahead of it.
Again, if we’re talking with them five to six months before they run out of cash, they have all kinds of options where we can work with them to try to stay liquid. For example, we can get them to sell off some of their servicing.
However, if we wait and they call us and they’re out of cash, they will probably default on their bonds. That’s the reason it’s important to build up infrastructure--so that we have that early warning system that’s in place to be able to work with these people. So that’s probably the biggest challenge we’re dealing with right now--to educate people on the fact this change is good, it’s wonderful, but we just need some more resources to be able to do our job properly.
Q: A lot of originators are getting into servicing and if they hold on to the servicing rights, they have a stream of income but then they don’t have the cash from selling the servicing rights. If you retain the servicing rights, it makes it more likely you will run out of cash.
A: Exactly. And that’s the reason two years ago we started allowing issuers to pledge their MSR values to banks as collateral for bank lines, again trying to liquefy their balance sheet as much as we can. We’re trying to work out different things like that to try and help. But again, that’s part of our monitoring because once we start doing that sort of thing, then we need to make sure we understand the terms people are using to pledge those MSRs – because if we have to move MSRs later on, we must be sure to understand all the legal entanglements that are being pledged to the banks. That’s what we’re working on now.
We’re trying to retool our operation to make sure we can deal effectively with this change that has occurred because we think that change is a positive. It’s really very healthy. My mantra at Ginnie Mae has been the more successful issuers we have, the more competition we have, the better it is for the mortgage market. MB
Robert Stowe England is a freelance writer based in Milton, Delaware, and author of Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance, published by Praeger and available at Amazon.com. He can be reached at
