There have been discussions over the past few years about the risks that independent mortgage banks’ (IMBs’) unstable funding sources create for the housing finance system. Some policymakers have been hoping for the return of commercial banks to their prior prominence in the single-family mortgage finance system. The reality is that over the past 90 years of government support of the single-family mortgage finance system, commercial banks have played a major role for only 20 years (1990 to 2010). The other 70 years were dominated by monoline mortgage bankers. Given that commercial banks will not become a major player in the single-family mortgage business in the foreseeable future, the Biden administration should evaluate structures to stabilize the funding sources for IMBs.
I am proposing that Ginnie Mae use the flexibility that Congress granted it to support the housing system to stabilize financing for IMBs. Ginnie Mae’s charter states that it can guarantee any financial obligation of a lender as long as the obligation is collateralized by mortgages insured by the Federal Housing Administration, the US Department of Veterans Affairs, or the Rural Housing Service. The Ginnie Mae–guaranteed mortgage-backed security has worked perfectly to allow a Ginnie Mae issuer to lock in interest spread on a mortgage portfolio and perfectly match the duration of the mortgages with the financial obligation funding the portfolio.
Ginnie Mae should evaluate how its current guarantee authority could support short-term funding for IMBs. Commercial paper, the most liquid form of short-term borrowing, could be established to support IMBs’ ability to fund buyouts of loans that are severely delinquent or mortgages that are required to be bought of the home equity conversion mortgage-backed security pools. By creating this new stable and lower-cost funding source, Ginnie Mae issuers of mortgage-backed securities and home equity conversion mortgage-backed securities will be able to reduce their costs of servicing and allow them to support borrowers in financial distress more effectively.
