Seeking relief from new capital pressures, issuers of Ginnie Mae mortgage-backed securities have been selling off pieces of their servicing-rights compensation to passive investors.
Ginnie officials said they have been working to accommodate the deals when possible in recent years, especially lately given the increased constraints on nonbank issuers' liquidity and capital. Depositories have more resources and experience when it comes to meeting capital requirements, but nondepositories have dominated issuance recently. Fifty-one percent of the $277 billion in Ginnie single-family MBS in fiscal year 2014 came from nonbanks, as compared with 18% of $389 billion in 2010.
Ginnie's first involvement in an excess-servicing sale occurred when Nationstar started selling off some of its excess servicing value to Newcastle Investment Corp. a few years ago, said Ted Tozer, the government agency's president. (Newcastle subsequently spun off all of its excess servicing by distributing shares of its subsidiary, New Residential Investment Corp., a publicly traded real estate investment trust.) Six or seven companies are using the structure, including some of the 10 largest nondepositories, Tozer said.
"Nondepositories, by definition, don't have access to a lot of cash or a lot of liquidity," Tozer said. "So what's happening is we're trying to mirror up a nondepository that has really good servicing skills and abilities with a source of liquidity or capital that's able to finance the [mortgage-servicing rights]. It has increased liquidity dramatically. A lot of the new nonbank servicers are using this as a way to fund their acquisitions of MSRs and grow their portfolios."
Ginnie's willingness to sign off on such agreements is notable in that getting the blessing of any of the three government or government-related entities that dominate the U.S. mortgage market Fannie Mae, Freddie Mac and Ginnie is considered the main hurdle to various types of deals in which MSRs are used as a vehicle to generate cash. It is also notable because excess-servicing deals are often done privately.
The capital relief from selling off excess servicing can be helpful to issuers, but Ginnie's excess-servicing transactions have become a little more challenging as the price to acquire originated or purchased mortgage servicing rights has risen in the last couple years, said Tom Millon, president and chief executive officer of Capital Markets Cooperative. CMC provides funding and related services to banks, credit unions and independent mortgage bankers. It also is a Ginnie issuer.
"It is a way to get capital relief, of course, on owning MSRs," Millon said. But "I think that the math these days is a little tough to make it work. It was easier to do that when you could buy the MSR cheap up front. MSR pricing has certainly normalized to a large degree, so it's harder to divvy up the cash flows and create acceptable returns for everyone involved."
The passive investors that purchase the excess-servicing fees are generally hedge funds or real estate investment trusts such as New Residential or Cherry Hill Mortgage Investment, a publicly traded REIT affiliate of lender Freedom Mortgage. New Residential did not return a call for comment, and Freedom said its executives would not be available to comment by deadline.
"We're trying to use this as a way to make sure that we can leverage everybody's capabilities to the maximum because we're finding in today's world that as the depositories pull out there's really kind of less of a 'one-stop shop,'" Tozer said.
Depository issuers tend to have strong capital and liquidity resources as well as servicing platforms, but nondepositories tend to have less of the former. So they often need partners that can help provide these resources. The transactions involve agreements among the issuers, investors and Ginnie.
The passive investor in the deals purchases the excess-servicing fee, but from Ginnie's perspective the servicing is still owned by the issuer.
"We sign an agreement with the passive investor to transfer the servicing," Tozer said. "If the servicer fails or does not do its job properly, we give the passive investor the opportunity to find someone else to service the loans and protect their investment," he said.
This agreement assures the investor that "we wont do anything to jeopardizeits investment without them knowing about it," Tozer said.
"We are just trying to find ways to work with these nondepositories," he said.