The Need for a Federal Liquidity Facility for Government Loan Servicing

Brief

The Need for a Federal Liquidity Facility for Government Loan Servicing

July 17, 2020

Abstract

This brief explores fundamental differences between the roles Ginnie Mae and the government-sponsored enterprises (GSEs) play in the mortgage market and explains how these differences contribute to elevated risk of liquidity stress for government loan servicing. Ginnie Mae plays a small role, restricted to guaranteeing timely payments to mortgage-backed securities (MBS) investors. It relies on its issuers to issue MBS and on the Federal Housing Administration, the US Department of Veterans Affairs, and the US Department of Agriculture for loan-level credit insurance. The GSEs perform all these functions in-house, giving them greater control and flexibility. As a result, Ginnie Mae is not in a position to mitigate liquidity risks for its issuers. We are concerned that the escalating count of COVID-19 cases could increase forbearance requests and lead to another liquidity panic. This will cause financial stress for Ginnie Mae issuers and will eventually harm consumers because cash-strapped servicers will not be able to provide effective and sustainable assistance to struggling borrowers, most of whom are low- and moderate-income households and first-time homebuyers. We recommend the Federal Reserve and the US Treasury begin developing a liquidity facility that could be activated quickly to minimize market disruption.

Centers

Cross-Center Initiative

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