Ginnie Mae 2020

cloud/shared service computing platform. ConsolidatingOur approach will allow us to gradually implement policiesinfrastructure will eliminate application complexity andand systems that fully incorporate digital mortgages intothe need for design across multiple data centers.Ginnie Mae’s business model. The business model weenvision will allow Issuers to securitize digital promissoryTo facilitate these consolidation and efficiency efforts,notes that are executed on a uniform smart documentin 2017 we awarded a 10-year vendor contract toformat, with elements and specifications like the SMARTprovide cloud-hosting services and move Ginnie Mae’sDoc format used by the Government SponsoredIT infrastructure into a government SmartCloud. ThisEnterprises (GSEs) Fannie Mae and Freddie Mac. Thelong-term contract eliminates the potential businessdesired format will leverage MISMO standards to facilitatecontinuity risk of re-competing data center contractsintegration and data exchanges. The use of a specifiedmore frequently.uniform format will also enable Ginnie Mae to replacemanual processes with automated system-based solutionsEarly in 2018, we successfully completed our first threeand streamline the initial certification process for loanwaves of migration, including accounting and financialpackages that contain digital mortgages.reporting operations, general ledger system, website,Issuer reporting feedback system, investor reportingWhile we engage in the technical work necessary toapplications and a host of other applications that managepromulgate the standards applicable to electronic closings,counterparty risks and Issuers’ portfolios. We alsodigital instruments and electronic vaults, we will also workdecommissioned hardware and software operations at ourwith the housing programs we support to standardizeformer hosted data center in May 2018.policies and any other origination requirements for digitalmortgages. We will also work closely with the GSEs toThroughout 2018, we will continue to migrate manybenefit from their experience with digital mortgages andsecuritization platform modernized applications, currentlyto ensure our solution can easily be adopted by Issuershosted at our pool processing agent, to the governmentalready using similar technology for conventional loans.SmartCloud. All migration activities will be complete inWe believe aligning policies across federal housingfiscal year 2019. Legacy mainframe processing operationsprograms and developing technical standards arewill remain at Ginnie Mae’s pool processing site.foundational steps; they will be our priority during the initialstages of our digital collateral strategy.Digital Collateral StrategyGinnie Mae has committed to developing andWe aim to complete these foundational steps by 2019implementing the policies, technology and operationaland then authorize pilot programs enabling Issuers tocapabilities necessary to take in digital promissory notessecuritize digital mortgages, even as we continue toand other digitized loan files as acceptable collateral fordevelop other aspects of our Digital Collateral Strategy.our securities. After an extensive review of the landscape,The pilot programs will enable us to test our approach,Ginnie Mae concluded that creating a digital mortgageoptimize processes and arrive at a strategy that promotesecosystem, from loan application through securitization,large-scale adoption.will increase access to credit for many Americans andenhance the integrity of our collateral by reducing the riskSomething to note about the business model we arefrom defects in loan instruments.contemplating as part of a pilot approach is that it wouldprohibit Issuers from commingling digital mortgages withGinnie Mae 2020 Roadmap for sustaining low-cost homeownership 7

traditional paper mortgages in the same loan package.certification processes, our business model will continue toWe would have two reasons for requiring the separationleverage third-party custodians for final certifications andof digital instruments from traditional collateral files.for maintaining loan files that are not yet digitized (such astitle insurance policies).First, pools or loan packages comprised of digitalmortgages (Digital Mortgage Pools) would be subjectSecond, by segregating digital mortgages, we intend toto a different pool certification process. Unlike traditionalprotect the marketability of any loan package containingpools that are delivered to and certified by a third-partytraditional paper notes. As an integral part of our mission,custodian, Digital Mortgage Pools would be deliveredwe need to promote the liquidity of mortgage servicingdirectly to a designated Ginnie Mae electronic vaultrights (MSRs). When we consider the pool-level structureand subject to an automated, system-based initialof the MBS Program, we believe that allowing traditionalcertification process.paper notes to be included within a pool or loan package,which also contains digital mortgages, may reduce theGinnie Mae has already begun to develop a plan to obtainmarketability of the corresponding MSR.the software, services and partnerships necessary todevelop auto-certification capabilities, similar to the auto-Despite this segregation at the pool level, Digitalcertification services offered by the GSEs.Mortgage Pools will qualify for delivery into multiple Issuersecurities, along with other pools comprised of traditionalAs outlined above, Ginnie Mae is in the final stages ofpaper notes. We plan to adjust pool and loan packageimplementing its Single-Family Pool Delivery Module,requirements to accommodate various levels of digitalwhich implements MISMO standards. Having a MISMO-mortgage production and will be considering additionalcompliant pooling and delivery system will enable Ginnieincentives for Issuers to go digital.Mae to validate that the borrower, property and loan dataattributes received as part of a pool data set are consistentAs we venture into the securitization of digital mortgages,with the digital instruments delivered to Ginnie Mae’swe look forward to receiving feedback from industryeVault. We have also initiated an acquisition strategysubject matter experts and MBS Program participants.for obtaining the necessary eVault services, which mayWe will announce additional details about ourinclude leveraging existing contract vehicles or usingimplementation timeline and the availability of pilota new and separate procurement process for theseprograms as they are developed.services. Despite the implementation of automated initialGinnie Mae 2020 Roadmap for sustaining low-cost homeownership 8

Pillar TwoENHANCING COUNTERPARTY RISK MANAGEMENTGinnie Mae’s approaches to counterparty risk are evolving toto ensure Issuers are meeting our standards andbe appropriate to circumstances and the need to safeguardguidelines, ongoing monthly and quarterly monitoring,the government guaranty that we steward.standards for approving or not approving particulartransactions, and a host of activities we undertake ifGinnie Mae primarily relies on private sector institutions,there is a threat or occurrence of Issuer failure. But asincluding banks and other lenders, to issue and serviceour share of securities outstanding and prominence havethe MBS we package and guarantee. Ginnie Maegrown, it is incumbent on us to continually upgrade theguarantees that investors who own the securities willsafeguards against Issuer failures.get paid their principal and interest on time, no matterwhat. If borrowers do not make their payments on time,Because Ginnie Mae operates in an industry centeredIssuer servicers must still make payments to investors.on flows of cash, counteracting counterparty risk entailsBut what about the possibility that a servicer will fail topaying close attention to liquidity. As the Brookingslive up to its responsibility to make payments, requiringInstitution points out in its February 2018 paper,the government, through Ginnie Mae, to step in? That“Liquidity Crises in the Mortgage Market,” the U.S.“counterparty risk” is of paramount concern and driveshousing finance system’s vulnerability to a liquiditymany of Ginnie Mae’s strategic decisions.crisis is underappreciated. Particularly in governmentinsured lending, where non-banks with greater need forGinnie Mae already takes many steps to manageexternal liquidity play an increased role in issuing andcounterparty risk. These include controls on whetherservicing Ginnie Mae MBS, the paper’s authors say suchcompanies can become Issuers, day-to-day interactionsvulnerability is acute and must be addressed.Ginnie Mae 2020 Roadmap for sustaining low-cost homeownership 9

Ginnie Mae has long emphasized the importance ofadvancing demands on its Issuers than the GSE modelsliquidity in the post-financial crisis era, in tune with thedo. The fact that it is harder to obtain secured financingobservations of the Brookings paper. We have writtenfor that function is problematic.about the topic, including in the September 2014 whitepaper, “An Era of Transformation.” We brought subjectGinnie Mae has already made it easier for Issuersmatter experts together to talk about the problemto leverage the value of their MSRs via ourand potential solutions at our June 2016 symposium,Acknowledgment Agreement. We are now exploring“Managing Value and Liquidity in the Servicing Market.”whether Ginnie Mae can, or should, change howAnd we have devoted a significant portion of ouradvances are handled when an Issuer has failed, whichprogram development in recent years to liquidity-relatedwould make it easier to finance these cash flows. Thisefforts. For example, we enhanced Issuer access tostep could potentially alleviate one of the greatestfinancing through our Acknowledgment Agreement andsources of counterparty risk we face: the potential forwe supported the greatly increased level of servicingan Issuer to be overwhelmed by the need to advancetransfers that occurred beginning in 2012.on defaulted loans in a time of economic stress.Addressing counterparty risk and liquidity will continueMany factors would affect the availability of suchto be high priorities for Ginnie Mae through 2020financing, and making it more available could requireand beyond. We are looking at two areas for riskstatutory or regulatory changes.management enhancement: getting more capital into thesystem and enhancing counterparty risk management.Getting more capital into the system byfostering investment in Ginnie Mae servicing.Allow a Broader Range of Institutions to Own MSRsIncreasing the store of capital in this sector would reducethe capital demand on traditional participants in ourprogram and reduce the cost of homeownership. WeGinnie Mae’s statutory purpose, spelled out in Titleare considering new approaches because our traditionalIII of the National Housing Act, is to “promote accessmodel — in which the originator of a loan pools it into,to mortgage credit by improving the distribution ofand then services, a guaranteed security — has becomeinvestment capital available for residential mortgageincreasingly fragmented. There is now much morefinancing.” So, it is in keeping with our mission to expandspecialization in residential finance. To some degree, ourthe supply of stable capital available to support MSRs.We are considering several ways of doing that.Make It Easier for Issuer Servicersto Get Advance FinancingIt is difficult for servicers in the government sphere toIncreasing the store ofcapital in this sector wouldget financing for security holder payments, insurancereduce the capital demand onpremiums, taxes and other remittances. The Brookingstraditional participants in ourpaper described the need to advance such paymentsto various entities as “the crux of the liquidity issue inmortgage servicing.” Servicing advances are a particularrisk to Ginnie Mae because our model places greaterGinnie Mae 2020 Roadmap for sustaining low-cost homeownershipprogram and reduce the costof homeownership. 10

program and procedures have been able to keep pace:Additional Standards for Leverage and FinancingWe have successfully accommodated long-standingGinnie Mae is scrutinizing more closely how approvedtrends such as third-party origination, servicing transfers,Issuers employ debt and otherwise finance theirsubservicing arrangements and MSRs financing.operations. Revised guidelines will soon be publishedthat detail how much of an Issuer’s assets can beBut the amount of fragmentation the Ginnie Mae modelsecurity for debt and how much in assets an Issuercan accommodate under its current authority hascan have relative to its Ginnie Mae net worth.limitations. Only institutions whose primary line of businessis mortgage origination and servicing can directly ownGinnie Mae MSRs. Institutions willing and able to investcapital in MSRs as passive owners can do so only througharrangements that are complex and lack a certain degreeof transparency — and are therefore unattractive to manyinstitutions. At the same time, a number of our currentIssuers have told us they want to focus on servicingoperations and reduce their exposure to the volatile andcapital-intensive business of MSR ownership.Statutory or regulatory change might have to occur beforenew types of entities could own MSRs. And we would needto ensure that capital from nontraditional sources wasavailable on terms that promote stability and discouragelarge-scale withdrawal of capital in times of stress.Enhancing counterparty risk management.We are strengthening the ways we monitor counterparties.Stronger oversight will reduce the possibility we mightneed to use government funds in exercising ourguarantee. The steps we will be taking include:Ginnie Mae 2020 Roadmap for sustaining low-cost homeownershipIn addition, Issuers will be required to notify Ginnie Maeabout transactions in which they sell off a portion of theirservicing income. While there is a legitimate role for suchtransactions, Ginnie Mae views them as financing and thusas introducing leverage that needs to be accounted for inan evaluation of the financial strength of the counterparty.New Acceptable Risk ParametersVia APM 18-02, Ginnie Mae established the requirement thatIssuer participation in the MBS Program meet acceptablerisk parameters. Ginnie Mae will continue to provide moreinformation about what lies inside and outside of suchparameters, where appropriate. Increasingly, however, GinnieMae’s evaluations of Issuer risk will be based upon modeledand other multiple-factor analyses. For example: Ginnie Mae classifies Issuers according to theirfinancial strength and manages their participationin our program differently depending on theirclassification. New requirements will soon begin 11

phasing in that subjecting Issuers to an analysis of howtheir financial strength would be impacted by adversefuture scenarios. These “stress testing” exercises willplay an increased role in our dialogues with Issuersand oversight activities in the future. Ginnie Mae is also developing modeling capabilitiesthat evaluate exposure to a single counterparty, relativeto the combination of the counterparty’s financial healthand the value of its MSR portfolio. This modelingGinnie Mae is exploringhow to make it easierfor the government tomanage the failure of alarge mortgage servicer.will inform decisions about how much exposure toindividual Issuers Ginnie Mae will permit.Special Requirements for Very Large InstitutionsFinally, Ginnie Mae is exploring how to make it easier forGinnie Mae has begun to evaluate institutions partly inthe government to manage the failure of a large mortgageterms of whether, in the event of a failure, the MSRsservicer, such as by using a “living will” approach. Ginniethat Ginnie Mae has guaranteed could be expected toMae will be developing enhanced requirements gearedbe readily absorbed by the private market or managedtoward resolution activities in the coming period.through Ginnie Mae’s contracted servicing capabilities.The rationale for the steps described above is theNew requirements are forthcoming that requirestatutory mandate for Ginnie Mae to “provide stability ininstitutions whose Ginnie Mae portfolio exceeds certainthe secondary market for residential mortgages,” as laidsize thresholds to obtain and maintain credit andout in Title III of the National Housing Act. By workingservicer ratings from approved rating agencies. Ginnieto expand the supply of long-term capital dedicated toMae believes that Issuers who attain a certain level ofownership of MSRs and developing stronger risk andprominence within the housing finance system shouldexposure thresholds, we believe we can promote a morebe expected to make greater investments in transparencystable ecosystem with a diverse range of participants.compared to other Issuers. The stress testing regimenmentioned above would probably be implemented firstOver the next few years Ginnie Mae will continue towith Issuers who meet the thresholds for required ratings.improve its ability to manage Issuer failures when theydo occur. Policies and procedure enhancements willIn addition, and building on recent requirements thatbegin with identifying and monitoring high-risk IssuersIssuers maintain diversified portfolios, steps will be takenand end with the disposition of assets acquired fromto ensure that the Ginnie Mae portfolio as a whole isterminated Issuers. The result will be a Ginnie Mae thatserviced by a sufficiently diversified set of Issuers andcan efficiently manage failures while reducing taxpayersubservicers. This concern could lead to limits on thelosses and disruption to the market.share of the total MSR portfolio that any one Issueror subservicer could own or service.Ginnie Mae 2020 Roadmap for sustaining low-cost homeownership 12

Pillar ThreeSTRONG FOCUS ON INNOVATIONThe coming years will undoubtedly bring opportunitiesLoan-Level Servicing

In late summer 2018, Ginnie Mae will test the portal with a small number of "early adopter" Issuers. Once we have migrated all Ginnie Mae data to the portal, we will transition the rest of the Issuer community to MyGinnieMae. Centralized Help Desk Today, Ginnie Mae offers two toll-free numbers for Help