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The Institutional Risk Analyst

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TCBI v Ginnie Mae Goes to Trial | Outlook for Commercial & Residential Mortgage Finance

Updated: Apr 23

April 21, 2024 | Premium Service | In this edition of The Institutional Risk Analyst, we review the most recent earnings for financials and release our latest report on the real estate sector, “Outlook for Commercial & Residential Mortgage Finance.” The good news is that the residential mortgage sector remains very quiet in terms of defaults, but rising interest rates are starting to cause price compression in high-end properties. 



The bad news is that the commercial real estate sector is being crushed under the weight of rising interest rates, higher capitalization rates for property valuation and idiotic progressive politics in blue cities and states. The 2019 rent control law passed by Albany is actually reducing the availability of rent-stabilized apartments in New York City. These vital assets have been rendered unfinanceable by banks and will eventually end up owned by New York State as public housing. 


Source: FDIC/WGA LLC


The extraordinary dichotomy between loss rates on residential properties and multifamily commercial assets is unchanged in Q1 2024. Net charge-offs on first & second lien 1-4 family mortgages are near zero, but loans on multifamily properties owned by banks are averaging 100% loss given default (LGD).  In our report, we note that construction & development loans generally are also near 100% LGD, but C&D loans on residential assets are near-zero default and net-loss rates.


The “Outlook for Commercial & Residential Mortgage Finance” report is available to subscribers to The IRA Premium Service and is also available for sale in our online store




Meanwhile in Washington, Ginnie Mae President Alanna McCargo resigned last week, ending one of the more unsettled periods in the agency’s recent past. Under McCargo, Ginnie Mae embraced an ersatz risk-based capital rule borrowed from federal bank regulators for independent mortgage banks. The new rule will limit leverage on mortgage servicing rights (MSRs) to 50% vs 65-70% today.


The change crafted by McCargo et al at Ginnie Mae has even less analytical basis than the discredited Basel III Endgame fiasco. It will drive small and mid-sized issuers out of the government loan market. Indeed, many larger issuers tell The IRA that they are quite amused and like the fact that Ginnie Mae is destroying smaller competitors for them. It is unclear, however, whether any GNMA mortgage issuers will be able to hold MSRs at a 50% leverage cap, especially in periods of high loan delinquency and low lending volumes.


In a rising interest rate environment, smaller issuers that lack large loan servicing portfolios and related periodic cash flows are basically toast. McCargo and her colleagues at Ginnie Mae made no secret of their desire to eliminate smaller FHA/VA/USDA issuers in favor of a few, larger non-bank mortgage banks. Trouble is, we think the risk folks at Ginnie Mae and the larger issuers are fooling themselves if they think the 50% leverage cap allows for profitable operations for any size government issuer.  


Among McCargo’s accomplishments at Ginnie Mae was taking no action before the failure of Reverse Mortgage Investment Trust (RMIT) in December 2021. Caught entirely off guard, McCargo then got very involved in the failure of the largest HECM issuer – arguably beyond the scope of her government employment -- until the Treasury seized the assets in late December. The result of her actions post-filing is a tendentious litigation between Ginnie Mae and Texas Capital Bank (TCBI). We wrote about the RMIT default in several previous issues of The IRA


By a remarkable coincidence, just a week before McCargo's resignation, the US District Court in Amarillo, TX, ruled that parts of the lawsuit against Ginnie Mae may proceed. “A lawsuit accusing Ginnie Mae of unlawfully interfering with a warehouse lender’s rights to FHA loan collateral can continue, a Texas court has ruled,” reports Monica Hogan of Inside Mortgage Finance, “However, it removed two counts of the lawsuit.” 


Story from inside HUD is that McCargo is tired, frustrated and wanted to resign months ago. The fact that the US Department of Justice could not get the entire TCBI lawsuit tossed is notable and illustrates the scope of the mess created by McCargo and the Biden Administration. We expect Ginnie Mae ultimately to prevail in the litigation, but McCargo’s tenure saw a lot of unnecessary damage done to non-bank issuers.


The litigation between Ginnie Mae and TCBI, Case 2:23-cv-00156-Z, is most unfortunate for the market for financing government loans and MSRs. Specifically, shining a bright light in a federal district court on the fact that lenders on GNMA forward and reverse mortgage servicing assets do not really, really, have a perfected security lien on the collateral is helpful how?  McCargo's actions and the fact that the case has not been dismissed in its entirety is very unhelpful given current market conditions.


McCargo’s tenure at Ginnie Mae illustrates the fact that putting intelligent, personable generalist political operatives into senior government positions that actually require a minimum degree of subject matter expertise and financial acumen is the road to disaster, both for the individuals concerned and the agencies. McCargo is said to be interviewing for jobs in the private sector, but she may be spending some quality time in Amarillo to participate in the TCBI litigation.


TCBI reported earnings last week and the market reaction was not bad. TCBI ranks 84th on the WGA Top Bank 100 Index and mostly scored in the third quartile of the group in Q1 2024.  The bank reported “a $19.0 million provision for credit losses, reflecting increases in criticized and non-accrual loans, growth in LHI and $10.8 million in net charge-offs, compared to a $28.0 million provision for the first quarter of 2023.” In other words, provisions were down YOY. 


All that said, we are still waiting for TCBI to come to Jesus on the RMIT mess.  The words “Ginnie Mae” were not mentioned by TCBI in the latest earnings release. While TCBI was able to recover some collateral from the RMIT bankruptcy (“Reverse Mortgage Bankruptcy Festers; IRA Housing Outlook”), the rest of the claims arising from the RMIT bankruptcy seem like a dead loss. But because of McCargo's actions, the matter now goes to trial. And TCBI gets to kick the RMIT disclosure down the road.


We are fans of TCBI, but must confess to being a little surprised that they have not pulled the plug on lending on reverse mortgage exposures (aka “HECMs”). We had a great discussion with former Federal Housing Finance Agency (FHFA) chief Mark Calabria in Las Vegas, where he recalled wanting to shut down the entire HECM market as unworkable. If there was justice in the world, then the US Treasury would make TCBI whole. But the statute says otherwise.


We think rising interest rates make another takeover of a reverse mortgage issuer by the US Treasury inevitable in 2024. Do you think Treasury Secretary Janet Yellen knows about this new expense to the taxpayer? We’d not be surprised to see TCBI pull out of the government sector. The low volumes and growing risks from the remaining issuers in a rising interest rate environment strike us as really dubious opportunities for any lender. There is just not enough business left in either forward or reverse mortgage markets for smaller lenders competing with market leader JPMorgan (JPM)


Since our comment on the prospect for releasing the GSEs from captivity, the outsized gains on both stocks were paired back significantly (“GSE Release? Really? Update: Ally Financial”). From the peak of $1.79 in March, this notable penny stock has retreated to just $1.21 at the Friday close. But hope springs eternal.  Fannie Mae is still up 43% YTD.  Is this a great country or what?


A number of readers and X folk questioned our analysis of the prospects for the GSEs outside of conservatorship. Let’s make it simple. If Moody’s has to rate Fannie and Freddie as finance companies, then they get downgraded to ~ “A+” vs “AA+” at the moment for the United States.  If the US gets downgraded again due to the absurd budget deficit, then the GSEs, the large banks and everything else that depends on the US sovereign rating gets downgraded, of note.


If the GSEs are downgraded and, more important, recognized as private corporate issuers a la PennyMac (PFSI), then next comes the question of ~ $8 trillion in conventional mortgage backed securities. If our readers think that the US markets could survive a forced Moody’s downgrade of all conventional MBS to, say, “A+”, then we’ll just wish everybody a nice day now. But if you agree with us that the GSEs would need to pay the US Treasury to wrap the MBS with that “AA+” rating, say 25bp annually on that $8 trillion in MBS, then clearly the GSEs cannot survive outside of the government terrarium. Next!


The “Outlook for Commercial & Residential Mortgage Finance” report is available to subscribers to The IRA Premium Service and is also available for sale in our online store.  Subscribers login to access the report below. 

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