BLOG VIEW: The Ginnie Mae Early Buyout program does not need to be modified – it needs to be eliminated.
Ginnie Mae should make principal and interest payments on delinquent loans. Servicer advances were designed to incentivize the servicer to process delinquent loans quickly and efficiently – yet a higher level of non-performing loans result in emergency measures to finance growing delinquent principal and interest advances.
As overall Ginnie Mae delinquency levels have increased about 15% over the last 12 months let us reevaluate the necessity (and risks) of servicers making delinquent advances for Ginnie Mae securities.
For well capitalized Ginnie Mae servicers, advances as a percentage of capital* are manageable, but hardly insignificant, as special purpose vehicle financing may be required.
Advances are ~100% of capital with just a 2% increase in delinquency. For medium sized servicers ($50 billion UPB in the estimates), it is a business ending scenario with advances many times capital and financing losses (if they can get credit) potentially wiping out profits.
The ability to finance and absorb earnings hits due to financing or earnings losses on servicer advances is most damaging to medium sized originators. Assuming an increase of 2% in overall delinquencies, here is an estimate of the advance/MSR equity and loss/income ratios for 1) the entire industry, 2) a large Ginnie Mae servicer, and 3) a medium sized servicer:
Periods of financial stress resulted in third party financing solutions such as servicing advance facilities (SARTs) that were created in the Great Recession to fund growing advance liabilities due to a significant increase in delinquent loans. Fortunately, lower than expected acceptance of allowed borrower COVID forbearance sidestepped a big funding problem.
A summary matrix of the convoluted servicer revenue and expenses model existing today for Ginnie Mae delinquent loans (in existing
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