Ginnie Mae and the Securitization of Federally Guaranteed Mortgages

JANUARY | 2022

Ginnie Mae and the

Securitization of Federally

Guaranteed Mortgages

At a Glance

e Government National Mortgage Association (Ginnie Mae), a part of the Department of Housing

and Urban Development, works to attract capital to the market for federally insured mortgages. It

does so by guaranteeing the timely payment of principal and interest on mortgage-backed securities

(MBSs) that private nancial institutions create from mortgages that are insured or guaranteed by

other federal programs.

Ginnie Mae’s guarantee operations have increased signicantly in recent years. In addition, the types

of mortgages included in the MBSs that Ginnie Mae guarantees—and the types of lenders that issue

those MBSs—have shifted in ways that could increase Ginnie Mae’s exposure to the risk of losses on

its guarantees.

In this report, the Congressional Budget Oce provides an overview of its baseline budget projec-

tions for Ginnie Mae and analyzes a scenario in which Ginnie Mae could be exposed to losses in a

period of severe economic stress.

•

In its July 2021 baseline, CBO estimates that new guarantees issued by Ginnie Mae in 2022 will

produce a budgetary savings of $2.2 billion in that year (using the measures for the cost of federal

credit programs specied in the Federal Credit Reform Act).

•

In the stress scenario—which represents the worst 1 percent of potential economic outcomes

over the coming decade—nancial institutions that issue Ginnie Mae–backed MBSs would fail

at higher-than-expected rates. Losses on the mortgages underlying those securities would also

be larger than expected. Under that scenario, Ginnie Mae’s new guarantees in 2022 would not

produce budgetary savings but instead would increase the decit by $3.0 billion in that year,

CBOestimates.

www.cbo.gov/publication/57176

Boxes

1. Eects of the Coronavirus Pandemic on Ginnie Mae 7

2. Possible Changes to Ginnie Mae’s Role From a Restructuring of the HousingFinanceSystem 9

Contents

Summary 1

Overview of Ginnie Mae and Its Exposure to Future Losses 2

The Role of Ginnie Mae in the SecondaryMortgageMarket 2

Ginnie Mae’s MBS Programs 3

Ginnie Mae’s Exposure to Losses 5

Volume and Loan Characteristics of GinnieMae’sGuarantees 5

Ginnie Mae’s Exposure to Future Losses FromChanges in Its Guarantees 8

Estimating Federal Subsidy Costs for Ginnie Mae in CBO’s Baseline and UnderaStress Scenario 8

Estimating the Volume of Guarantees 9

Estimating the Subsidy Rate on GinnieMae’sGuarantees 10

Estimating the FCRA Subsidy Rate UnderaStressScenario 12

Estimates of Ginnie Mae’s Budgetary Costs 15

List of Tables and Figures 16

About This Document 17

Notes

Unless this report indicates otherwise, all years referred to are federal scal years, which run from

October 1 to September 30 and are designated by the calendar year in which they end.

Numbers in the text and tables may not add up to totals because of rounding.

References to the Congressional Budget Oce’s baseline budget projections refer to the July 2021

baseline.

Ginnie Mae and the Securitization of

Federally Guaranteed Mortgages

Summary

e Government National Mortgage Association,

known as Ginnie Mae, is a government-owned corpo-

ration within the Department of Housing and Urban

Development. Since its establishment in 1968, Ginnie

Mae has aimed to attract capital to the market for

federally insured mortgages, and thus reduce costs to

mortgage borrowers, while minimizing risk to taxpayers.

Ginnie Mae carries out that mission by guaranteeing the

timely payment of principal and interest on mortgage-

backed securities (MBSs) that private nancial institu-

tions create from home loans that are insured or guar-

anteed by other federal programs, such as those of the

Federal Housing Administration (FHA), the Department

of Veterans Aairs (VA), and the Department of

Agriculture’s Rural Housing Service (RHS).

Ginnie Mae’s MBS guarantees are similar to the ones

provided by Fannie Mae and Freddie Mac, except that

those two government-sponsored enterprises focus on

conventional mortgages that are not federally insured.

In addition, eective federal support for Fannie Mae’s

and Freddie Mac’s guarantees is limited, whereas Ginnie

Mae’s guarantees are explicitly backed by the full faith

and credit of the federal government.

1. Fannie Mae and Freddie Mac are government-sponsored

enterprises that were established by federal law to provide a

stable ow of funding for home loans. ey buy mortgages

that are not insured or guaranteed by a federal agency, pool

them to create MBSs, and sell the securities to investors with a

guarantee against most losses from defaults on the underlying

loans. Although Fannie Mae and Freddie Mac were originally

independent entities, they have been under the government’s

control (in federal conservatorships) since the nancial crisis of

2008. For more details, see Congressional Budget Oce, Fannie

Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage

Market (December 2010), www.cbo.gov/publication/21992.

2. For a description of the limits on federal support for Fannie Mae

and Freddie Mac, see Congressional Budget Oce, e Eects of

Increasing Fannie Mae’s and Freddie Mac’s Capital (October 2016),

www.cbo.gov/publication/52089.

e volume of Ginnie Mae’s business has increased

sharply in the past 15 years, reecting the growth in

the volume of federally insured mortgages over that

period. e composition of Ginnie Mae’s business

has also changed. For example, a growing share of the

MBSs guaranteed by Ginnie Mae contain loans issued

by nonbank nancial institutions. Such institutions are

generally subject to a dierent regulatory regimen and a

more uncertain process in the event of failure than tradi-

tional banks are. In addition, a growing share of Ginnie

Mae–guaranteed MBSs contain loans backed by federal

mortgage guarantee programs, such as VA’s, that provide

a partial rather than a full guarantee against losses when

a borrower defaults. ose changes may increase Ginnie

Mae’s risk to taxpayers, although the extent of the addi-

tional risk is uncertain.

In its baseline budget projections, the Congressional

Budget Oce estimates that Ginnie Mae’s new guaran-

tees will have a negative subsidy rate throughout the next

10 years, according to the accounting approach pre-

scribed by the Federal Credit Reform Act of 1990. e

subsidy rate measures the budgetary cost to the federal

government per dollar of new guarantees. A negative

subsidy rate represents a budgetary savings.

Although Ginnie Mae’s activities are projected to reduce

the budget decit under normal, or even moderately

stressful, economic conditions, the corporation could be

exposed to losses in a period of severe economic stress.

To explore the potential for such losses, CBO analyzed a

scenario with higher-than-expected failure rates among

issuers of Ginnie Mae–guaranteed securities and larger-

than-expected losses on the mortgages underlying those

securities.

at stress scenario—which represents the

3. Ginnie Mae’s exposure to risk ultimately comes from the

institutions that service the mortgages in a Ginnie Mae–

guaranteed MBS. (Servicers collect the payments that borrowers

owe on those loans.) e servicer is not always the same institution

that originated the loan for the borrower or that issued the MBS.

In this report, CBO uses “issuer” to describe an institution that

plays all three roles—originator, issuer, and servicer.

2 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES JANUARY 2022

worst 1 percent of economic outcomes over the coming

decade, CBO estimates—reects some of the increased

uncertainty for Ginnie Mae stemming from the recent

increases in the number of nonbank issuers and in the

volume of VA-guaranteed loans.

e conditions of the stress scenario would signicantly

alter Ginnie Mae’s eect on the federal budget. For

example, CBO projects that in 2022, Ginnie Mae’s new

guarantees would increase the decit by $3.0 billion

under the stress scenario, as opposed to reducing the

decit by $2.2 billion in CBO’s baseline estimate.

Overview of Ginnie Mae and Its

Exposure to Future Losses

e federal government operates various programs to

encourage lenders to provide mortgages to people who

might otherwise have trouble getting a home loan, such

as rst-time homebuyers, veterans, people with relatively

low income, or people who live in places where access

to credit is limited. Ginnie Mae was created to make it

easier for lenders that make loans under those programs

to sell the loans in the secondary (resale) market and

thus replenish their funds to make additional mortgages.

Ginnie Mae pursues that goal by guaranteeing that

investors who buy mortgage-backed securities based on

such loans will continue to receive scheduled principal

and interest payments on the loans if the MBS issu-

ers or mortgage borrowers fail to meet their nancial

obligations.

In recent years, Ginnie Mae’s guarantee operations

have grown substantially. At the same time, the types of

mortgages included in the MBSs that Ginnie Mae guar-

antees—and the types of lenders issuing those MBSs—

have changed in ways that could increase Ginnie Mae’s

exposure to the risk of losses on its guarantees.

The Role of Ginnie Mae in the

SecondaryMortgageMarket

Ginnie Mae oversees the process in which private issuers

create MBSs backed by the full faith and credit of the

federal government by pooling mortgages that are

guaranteed or insured by various federal agencies. ose

agencies include the Federal Housing Administration

and the Oce of Public and Indian Housing (PIH),

both part of the Department of Housing and Urban

Development; the Department of Veterans Aairs; and

the Rural Housing Service, part of the Department of

Agriculture. Some of those agencies’ programs, such as

FHA’s, provide mortgage insurance that protects lend-

ers against losses if a borrower defaults on a mortgage.

When that happens, FHA pays a claim to the lender

for the unpaid principal balance of the defaulted mort-

gage. Other programs, such as VA’s, guarantee to repay a

certain percentage of a mortgage in default. ose federal

backstops typically mean that lenders provide mortgages

to qualifying borrowers on better terms (such as with

lower interest rates, lower closing costs, or smaller down

payments) than they might otherwise.

Ginnie Mae’s role in turning such loans into

government-guaranteed mortgage-backed securities,

which issuers can sell to investors, involves steps at every

stage of the securitization process:

•

Approving new issuers of MBSs;

•

Managing the issuers and the infrastructure (such

as technology, program rules, legal documentation,

and personnel) for pooling loans to serve as collateral

forMBSs;

•

Maintaining the technology, operations, legal

disclosures, and personnel necessary to guarantee the

timely payment of principal and interest to investors

that buy the MBSs; and

•

Managing outstanding MBSs that Ginnie Mae

takes over from issuers that have defaulted on their

obligations (see Figure 1).

e fact that Ginnie Mae’s guarantee is explicitly backed

by the full faith and credit of the federal government

makes the underlying mortgages more liquid, helping to

reduce costs for borrowers and increasing the availability

of nancing for lenders.

(In a liquid market, investors

can quickly buy or sell large quantities of an asset with-

out aecting its price.) Without Ginnie Mae’s guarantee,

there would be less demand for MBSs created from

federally insured mortgages because investors would be

exposed to the risk of losses if MBS issuers failed, partic-

ularly during times of economic distress and increased

delinquencies by borrowers.

Unlike with traditional mortgages, which lenders

typically sell to securitizers (such as Fannie Mae and

Freddie Mac), issuers of Ginnie Mae–guaranteed MBSs

do not sell the underlying mortgages. Instead, the issuer,

4. e explicit federal backing for Ginnie Mae’s guarantee diers

from the eective federal support for the guarantees of Fannie

Mae and Freddie Mac. For a description of the federal support

oered to Fannie Mae and Freddie Mac, see Congressional

Budget Oce, e Eects of Increasing Fannie Mae’s and Freddie

Mac’s Capital (October 2016), www.cbo.gov/publication/52089,

and Eects of Recapitalizing Fannie Mae and Freddie Mac

rough Administrative Actions (August 2020), www.cbo.gov/

publication/56496.

3JANUARY 2022 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES

or a designated party, continues to receive payments

from borrowers and forwards part of those payments

to the MBS investors (see Figure 2). If borrowers fail

to make their payments, the issuer is required to send

the expected principal and interest payments to the

investors, as long as the underlying loans remain in the

MBSs. Once the issuer determines that a borrower is

unable or unwilling to resume regular payments, it will

remove that borrower’s loan from the MBS, repay the

investor the remaining principal balance, and try to

recover the amount owed from the borrower. At the end

of that recovery process, the issuer may work to settle any

potential claim with the primary government guarantor,

typically FHA or VA. As long as issuers perform their

duties, Ginnie Mae’s only involvement in those cash

ows is providing the infrastructure necessary for issuers

to remit payments to MBS investors and collecting the

guarantee fee it charges issuers.

Ginnie Mae’s role and exposure to risk change signi-

cantly if an issuer fails to perform its duties. In that

case, Ginnie Mae steps into the role of issuer—servicing

and administering the MBSs (by promptly forwarding

principal and interest payments on the securities and

providing disclosures to investors), handling defaults and

foreclosures on the underlying loans, and working with

the primary government guarantors to settle claims.

Ginnie Mae’s MBS Programs

Ginnie Mae’s largest securitization program—and the

focus of this report—involves MBSs composed of mort-

gages on single-family homes. However, Ginnie Mae also

oers securitization programs for other types of loans,

including multifamily mortgages (for properties with ve

or more units), mortgages for manufactured housing,

and reverse mortgages (in which households with at least

one member age 62 or older can borrow money by using

the equity in their home as collateral).

5. Rather than perform the role of issuer itself, Ginnie Mae could

transfer those responsibilities to another issuer or hire a third

party (known as a subservicer) to handle them. In either case,

Ginnie Mae’s guarantee, and thus its exposure to risk, would

remain in eect.

6. For more information about multifamily mortgages and reverse

mortgages, see Congressional Budget Oce, e Federal Role in

the Financing of Multifamily Rental Properties (December 2015),

www.cbo.gov/publication/51006, and e Role of the Federal

Housing Administration in the Reverse-Mortgage Market (May

2019), www.cbo.gov/publication/55247.

Figure 1 .

The Role of Ginnie Mae in the Market for Mortgage-Backed Securities

During Repayment of

Loans Underlying MBSs

Before Issuance of

MBSs

After MBS

Issuers Fail

Approves Financial

Institutions to Issue

MBSs Guaranteed by

Ginnie Mae

Guarantees Principal

and Interest

Payments to Investors

That Buy MBSs

Monitors the Financial and Operational

Capacity of Issuers

Manages the MBS

Programs’

Infrastructure

Manages

the MBSs of Failed

Issuers

Data source: Congressional Budget Oce.

MBSs = mortgage-backed securities.

a. Program infrastructure consists of the technology, legal documentation, personnel, and other things needed to pool mortgages and issue MBSs.

4 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES JANUARY 2022

In addition to dierent types of mortgages, Ginnie Mae

oversees the creation of dierent types of MBSs. e two

main types are single-class securities called Ginnie MaeI

and Ginnie Mae II.

A Ginnie Mae I security is based

on mortgages from the same issuer that total at least

$1million and have the same interest rate. A Ginnie

Mae II security, by contrast, can include mortgages from

dierent issuers and with dierent interest rates (which

can range from 0.25 percentage points to 0.75 percent-

age points above the rate on the MBS). e multi-issuer

feature of Ginnie Mae II MBSs is particularly important

for smaller issuers, which may have trouble acquiring

7. Ginnie Mae also guarantees multiclass securities, which are based

on a combination of existing MBSs. ose securities are not

covered in this report.

enough loans to meet the size requirement for a Ginnie

Mae I MBS.

e multi-issuer pool of loans underlying a Ginnie

MaeII MBS functions in much the same way as the pool

of loans from a single issuer. Each issuer receives a share

of the Ginnie Mae II security that is based on the unpaid

principal balance of the loans it contributed. After the

MBS is issued, a central agent collects payments from

all of the issuers and makes a single monthly payment to

each investor holding that security.

8. See Ted Tozer, A Primer and Perspective on Ginnie Mae (Milken

Institute, October 2019), https://tinyurl.com/54kw29fm.

Figure 2 .

Ginnie Mae’s Cash Flows, by Financial Condition of MBS Issuer

Solvent Issuer

Failed Issuer

Mortgage

Borrower

FHA, VA, and

Other Federal

Mortgage

Programs

FHA, VA, and

Other Federal

Mortgage

Programs

MBS Investor

MBS

Issuer

Ginnie

Mae

Ginnie

Mae

Mortgage

Borrower

MBS Investor

Payments

From Borrowers

and Payments

on Delinquent

Mortgages

Payments

From Borrowers

and Payments

on Delinquent

Mortgages

Mortgage

Payments

Payments to Settle

Claims on Insured

Mortgages

Guarantee Fee

Payments

Payments to Settle

Claims on Insured

Mortgages

Mortgage

Payments

Data source: Congressional Budget Oce.

FHA = Federal Housing Administration; MBS = mortgage-backed security; VA = Department of Veterans Aairs.

5JANUARY 2022 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES

e volume of Ginnie Mae II securities far exceeds

that of Ginnie Mae I securities. At the end of 2020,

the outstanding balance of single-family Ginnie Mae II

MBSs totaled about $1.5 trillion, compared with about

$0.1trillion of single-family Ginnie Mae I MBSs.

Ginnie Mae’s Exposure to Losses

Because Ginnie Mae’s guarantee is limited to providing

timely principal and interest payments to investors in its

MBSs, its exposure to losses on its guarantees is bu-

ered by other parties in a mortgage transaction. e rst

level of protection comes from the homeowner’s down

payment and resources for repaying the mortgage. Any

equity contributed by the homeowner (dened as the

dierence between the value of the home and the balance

of the mortgage) reduces both the likelihood and the

severity of default.

If a borrower defaults and the default leads to losses,

the primary government guarantee from FHA, VA, or

another federal mortgage program covers a signicant

portion of losses. FHA’s mortgage insurance provides a

full credit guarantee, which covers all reasonable losses

from a default. Guarantees by VA and the Rural Housing

Service are partial—from 25 percent to 50 percent of

the unpaid mortgage balance for VA and 90 percent for

RHS. In many cases, those amounts are large enough to

cover much of the expected losses from a default because

some money is eventually recovered from the borrower.

Despite down payments and primary government guar-

antees, MBS issuers frequently bear costs on mortgages

for borrowers who fail to make their monthly payments.

For a delinquent mortgage—in which the borrower

is behind on payments but is not yet declared to be

in default—the issuer is required to make scheduled

principal and interest payments to MBS investors. e

issuer generally recoups those costs once the borrower

starts making scheduled monthly payments again, or

once a claim is settled with the government guarantor.

Nevertheless, such an obligation presents a liquidity risk

for the issuer. For example, an issuer might have to raise

the money to cover a shortfall resulting from an increase

in late payments by borrowers during an economic

slowdown, when the issuer might have more trouble

borrowing money than at other times. at liquidity risk

is particularly acute for nonbank nancial institutions,

which do not have access to the same types of funding

9. See Ginnie Mae, “Unpaid Principal Balance (UPB) Summary”

(September 2020), https://tinyurl.com/fxfk2db.

that banks do (such as deposits from customers and

short-term loans from the Federal Reserve’s discount

window).

An MBS issuer can also face solvency con-

cerns if too many costs associated with defaults are not

repaid as part of the claim process—whether because of

the partial guarantee from VA and RHS or because some

foreclosure costs are not reimbursable even under FHA’s

full guarantee.

Ginnie Mae’s guarantee that investors in qualifying

MBSs will receive timely payments of principal and

interest requires it to assume the obligations for an issu-

er’sentire portfolio of outstanding MBSs when the issuer

fails. As a result, Ginnie Mae faces the same concerns

that issuers face, including having to cover uncollected

mortgage payments for MBS investors and settle claims

with primary government guarantors for defaulted

mortgages. Ginnie Mae’s liquidity concerns are alleviated

by the fact that it can borrow funds from the Treasury.

But that borrowing exposes taxpayers to the risk that the

funds will not be recovered from the mortgage borrowers

or primary government guarantors.

To compensate for that risk, Ginnie Mae charges issuers

a guarantee fee of 6 basis points (0.06 percent) of the

outstanding balance of an MBS. at fee is set by law

as a part of the National Housing Act, which mandates

that Ginnie Mae charge no more than 6 basis points for

MBSs made up of single-family loans.

Ginnie Mae can

reduce that fee for certain securities, but it has limited

ability to adjust its fee to account for the expected cost

of its guarantee. Ginnie Mae’s fee is in addition to the

up-front and ongoing guarantee fees that the primary

guarantor charges lenders.

Volume and Loan Characteristics of

GinnieMae’sGuarantees

e dollar amount of new MBSs that Ginnie Mae

guarantees in a year is directly related to the amount of

new mortgages guaranteed by the primary government

guarantors. As a result, the volume and loan character-

istics of Ginnie Mae’s guarantees closely track those of

10. See Karan Kaul and Ted Tozer, e Need for a Federal Liquidity

Facility for Government Loan Servicing (Urban Institute, July

2020), https://tinyurl.com/3c6b2exm; and Karan Kaul and

Laurie Goodman, Should Nonbank Mortgage Companies Be

Permitted to Become Federal Home Loan Bank Members? (Urban

Institute, June 2020), https://tinyurl.com/vsuck6bf.

11. Sec. 306(g)(3)(A) of the National Housing Act, 12 U.S.C.

§1721(g)(3)(A).

6 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES JANUARY 2022

FHA and VA. From a low of $77 billion in calendar

year 2006, the volume of new Ginnie Mae guarantees

grew to more than $775 billion in 2020 (see Figure 3).

e volume of new guarantees was especially high in

2020, partly because low interest rates, which the Federal

Reserve put in place to try to lessen the economic eects

of the coronavirus pandemic, led to a wave of mortgage

renancing. (For more details about how the pandemic

aected Ginnie Mae’s operations in 2020, see Box 1.)

e total value of outstanding Ginnie Mae–guaranteed

MBSs also increased over the 2006–2020 period, from

about $0.4 trillion at the end of calendar year 2006 to

more than $2.1 trillion at the end of 2020.

12. See Ginnie Mae, Global Markets Analysis Report (October 2021),

https://tinyurl.com/ppdhuwkx.

13. See Ginnie Mae, “Unpaid Principal Balance (UPB) Summary”

(December 2020), https://tinyurl.com/fxfk2db, and “Issuance

Summary” (December 2020), https://tinyurl.com/2p857z3r.

e total dollar value of outstanding MBSs grows each year by

net issuance, which is the dierence between the amount of

new MBSs issued in a year and the amount of previously issued

MBSs repaid during that year. e gap between annual new

issuance and net issuance depends mainly on the renancing

of outstanding mortgages. at gap is small in years with little

Ginnie Mae’s share of new agency MBSs—dened as

the total MBSs issued by Fannie Mae, Freddie Mac, and

Ginnie Mae—has also increased in recent years. Ginnie

Mae was responsible for about 8 percent of the agency

MBSs issued in calendar year 2006. Its share rose steadily

after that, peaking at 34 percent from 2015 through

2018. Ginnie Mae’s share of new agency MBSs declined

to 24 percent in 2020, despite record growth in its newly

guaranteed securities in that year.

In addition to the growth in the volume of Ginnie Mae’s

MBS guarantees since the nancial crisis of 2008, the

characteristics of the mortgages included in those MBSs

have changed in several ways. One signicant shift is

the increase in the volume of mortgages originated or

serviced by nonbank institutions—nancial rms that

renancing and large in years with a great deal of renancing.

For example, with the surge in renancing in calendar year 2020

that resulted from low interest rates, new issuance of Ginnie

Mae–guaranteed MBSs exceeded $775 billion, but net issuance

declined by about $14 billion. e result was a small decrease

in the total value of outstanding Ginnie Mae–guaranteed

MBSsbetween the end of December 2019 and the end of

December 2020.

Figure 3 .

Amount of New Mortgage-Backed Securities Guaranteed by Ginnie Mae, CalendarYears

2000 to 2020, by the Mortgages’ Primary Guarantor

Billions of Dollars

100

200

300

400

500

600

700

800

900

2000 2005 2010 2015 2020

FHA

Other

Data source: Ginnie Mae, Global Markets Analysis Report (October 2021), https://tinyurl.com/ppdhuwkx. See www.cbo.gov/publication/57176#data.

FHA = Federal Housing Administration; VA = Department of Veterans Aairs.

a. Includes the Oce of Public and Indian Housing (part of the Department of Housing and Urban Development) and the Rural Housing Service (part of the

Department of Agriculture).

7JANUARY 2022 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES

do not have a banking license and do not accept depos-

its. At the end of calendar year 2013, loans by nonbank

nancial institutions made up about 50 percent of the

mortgages in new Ginnie Mae–guaranteed MBSs. By the

end of 2020, that share had risen to more than 90 per-

cent. e share of mortgages from nonbank institutions

included in Fannie Mae’s and Freddie Mac’s new MBSs

also increased during that period, but by less than the

growth for Ginnie Mae–guaranteed MBSs.

14. Several factors have been cited as reasons for the increased role

of nonbank nancial institutions in the market for Ginnie

Mae–guaranteed MBSs. ose factors include the processes

that the federal government has used since the 2008 nancial

crisis to pursue recoveries on FHA-insured mortgages in default,

tax changes that have aected the value of mortgage-servicing

rights,and technological advances by nonbank institutions. See

Another signicant shift is the increasing prevalence of

loans guaranteed by VA in the securities that Ginnie

Mae guarantees. From calendar year 2000 through 2009,

VA loans accounted for 21 percent of the mortgages in

Ginnie Mae–guaranteed MBSs, on average. Since 2015,

that share has averaged 44 percent, reaching a peak of

55percent in 2020. e total dollar amount of home

loans guaranteed by VA has also grown, for a number of

possible reasons, including the stricter eligibility require-

ments that mortgage lenders adopted for non-VA orig-

inations as a result of the nancial crisis; the greater use

by borrowers of renancing options available through

You Suk Kim and others, “Liquidity Crises in the Mortgage

Market,” Brookings Papers on Economic Activity (Spring 2018),

https://tinyurl.com/uu53b5a4.

Box 1 .

Eects of the Coronavirus Pandemic on Ginnie Mae

The coronavirus pandemic that began in 2020 and the

resulting recession in the United States have had a negative

eect on the ﬁnancial condition of many borrowers, including

those with mortgages contained in Ginnie Mae–guaranteed

mortgage-backed securities (MBSs). In response to the

economic slowdown, the Federal Housing Administration

(FHA), the Department of Veterans Aairs (VA), and the Rural

Housing Service all announced that borrowers with loans

backed by their guarantee programs could reduce or suspend

mortgage payments.

Such loans are referred to as being in

forbearance.

As a result of those actions, the percentage of borrowers with

mortgages included in Ginnie Mae–guaranteed MBSs who

were behind on their monthly payments increased signiﬁcantly.

For example, the share of people with FHA-insured mortgages

who were at least 90 days past due (including loans in forbear-

ance) or who were in foreclosure rose from 3.5 percent at the

end of calendar year 2019 to 10.8 percent at the end of 2020.

For VA-guaranteed mortgages, the share of borrowers who

were at least 90 days past due (including loans in forbearance)

1. See Department of Housing and Urban Development, “COVID-19 Resources

for Homeowners” (June 25, 2021), www.hud.gov/coronavirus/homeowners;

Department of Veterans Aairs, “VA Home Loans: Information for VA Home

Loan Borrowers During COVID-19” (October 20, 2021), https://tinyurl.

com/3xcs9cyb; and Department of Agriculture, “Rural Development

COVID-19Response” (June 24, 2021), www.rd.usda.gov/coronavirus.

or who were in foreclosure increased from 1.9 percent to

5.8percent in 2020.

A sharp increase in delinquent borrowers can create stress

for issuers of Ginnie Mae–guaranteed MBSs because they are

required to forward the missed payments to MBS investors. In

an attempt to alleviate that stress, Ginnie Mae announced a

series of actions early in the pandemic, including the Pass-

Through Assistance Program (PTAP).

Under that program, a

Ginnie Mae–approved issuer with a shortfall of available funds

can ask Ginnie Mae to make advance payments to investors

without being declared a failed issuer (whose assets are taken

over by Ginnie Mae). In exchange, the issuer is required to

repay the advance, with interest, in a speciﬁed period.

PTAP was designed to be a program of last resort for issuers,

requiring them to exhaust all other funding options before

applying for an advance from Ginnie Mae. As a result, the

volume of PTAP advances has been fairly low. From April 2020

through September 2021, Ginnie Mae issued only 23 advances,

totaling $13.1 million.

By the end of September 2021, the

balance of all advances had been repaid.

2. See Ginnie Mae, Global Markets Analysis Report (prepared by State Street

Global Advisors and the Urban Institute’s Housing Finance Policy Center,

March 2020 and February 2021), https://tinyurl.com/ppdhuwkx.

3. See Ginnie Mae, “All Participant Memorandum 20-03: Availability of Pass-

Through Assistance Program for Participants in Ginnie Mae’s Single-Family

MBS Program” (April 10, 2020), https://tinyurl.com/5bx3nua2.

4. See Ginnie Mae, “Issuers: Ginnie Mae PTAP Assistance” (accessed

November 9, 2021), https://tinyurl.com/y82xjvba.

8 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES JANUARY 2022

VA; and, since January 1, 2020, the removal of the cap

on the size of a mortgage eligible for a VA guarantee.

Ginnie Mae’s Exposure to Future Losses

FromChanges in Its Guarantees

e protected position of Ginnie Mae’s guarantees limits

expected losses, meaning that Ginnie Mae is not likely

to suer large losses from its guarantees under normal

economic conditions. But Ginnie Mae would be exposed

to the risk of large losses in a period of severe economic

stress that included high default rates on mortgages

and widespread insolvency among issuers of its guaran-

teed MBSs. e two recent shifts in those MBSs—the

increasing prevalence of loans from nonbank institutions

and of VA-guaranteed loans—could increase Ginnie

Mae’s losses during times of stress.

Nonbank nancial institutions are subject to state-level

oversight, and Ginnie Mae reviews them as MBS issuers.

Nevertheless, nonbank nancial institutions are typically

subject to less regulation of their safety and soundness

than banks are. ey also have less access to the sources

of liquidity available to banks, such as consumer depos-

its and Federal Reserve lending programs.

As a result,

the possibility of insolvency by issuers of Ginnie Mae–

guaranteed MBSs may increase along with the share of

mortgages from nonbank institutions included in those

MBSs. (Investors that lend to nonbank nancial institu-

tions may exert more market discipline on those insti-

tutions than they do on banks because their payments

are not protected by a government guarantee, such as

federal deposit insurance. Such market discipline would

oset some of the eect that less regulation could have

on nonbank institutions’ risk of insolvency.) Nonbank

nancial institutions are also subject to a more uncertain

resolution process in the event of failure than banks are,

which could expose Ginnie Mae to additional nancial

and operational risk.

Ginnie Mae has attempted to address those issues by

tightening standards for its MBS issuers, such as require-

ments for their liquidity, net worth, and ratio of capital

15. For more about the lifting of that cap, see Veterans Benets

Administration, “Blue Water Navy Vietnam Veterans Act of

2019” (February 5, 2021), https://tinyurl.com/2p9f33vb.

16. See You Suk Kim and others, “Liquidity Crises in the Mortgage

Market,” Brookings Papers on Economic Activity (Spring 2018),

https://tinyurl.com/uu53b5a4.

to assets. Ginnie Mae has also increased its ongoing

monitoring of issuers’ nancial condition.

All mortgages included in Ginnie Mae–guaranteed secu-

rities have a primary federal guarantee, but those federal

guarantees are not identical. In particular, VA’s guaran-

tee covers only part of the losses on a defaulted loan,

with MBS issuers responsible for the rest. As a result,

the possibility of insolvency by issuers of Ginnie Mae–

guaranteed MBSs may increase along with the share

of VA-guaranteed loans included in those securities.

(Ginnie Mae’s risks could change if the corporation’s role

was modied as part of broader changes to the housing

nance system. For details, see Box 2.)

Estimating Federal Subsidy Costs for

Ginnie Mae in CBO’s Baseline and

UnderaStress Scenario

In the federal budget, the subsidy outlays recorded for

Ginnie Mae in a given year equal the dollar amount

of new mortgage-backed securities that Ginnie Mae

guarantees in that year multiplied by the budgetary cost

per dollar of new guarantees, also known as the sub-

sidy rate.

To project subsidy outlays for Ginnie Mae,

CBO needs estimates of both the expected volume of

Ginnie Mae’s guarantees and Ginnie Mae’s subsidy rate.

17. See Ginnie Mae, An Era of Transformation (September 2014),

https://tinyurl.com/3fkn9ty6 (PDF, 464 KB), and Ginnie Mae

2020: Roadmap for Sustaining Low-Cost Homeownership (June

2018), https://tinyurl.com/taz85ma7 (PDF, 6 MB). e capital

requirement for nonbank nancial institutions is a total adjusted

net worth (based on Ginnie Mae’s denition) equal to at least

6 percent of total assets. In comparison, banks, thrifts, bank

holding companies, and savings and loan holding companies

must meet one of the following targets: tier 1 capital (including

retained earnings and stock) equal to at least 5 percent of total

assets or 6 percent of risk-based assets, or total capital equal to at

least 10 percent of risk-based assets. See Ginnie Mae, Ginnie Mae

MBS Guide, 5500.3, Rev. 1 (accessed March 9, 2021), Chapter 2,

pp. 2-9 and 2-10, https://tinyurl.com/d58c7twd.

18. e subsidy cost associated with the current year’s guarantees

(which is net of the guarantee fees that Ginnie Mae collects from

MBS issuers) is the largest component of Ginnie Mae’s eect

on the federal budget. But the budget reects other aspects of

Ginnie Mae’s operations as well. Ginnie Mae earns interest on

its investments in Treasury securities, which it makes primarily

with cash from previously collected fees not used to cover

expenses. Itis also credited with osetting collections from fees

other than its guarantee fee. Furthermore, Ginnie Mae receives

Congressional appropriations to pay for salaries and other

operating expenses. In addition, the budget reects credit subsidy

reestimates, which are revisions to estimates of the subsidy costs

of guarantees made in previous years.

9JANUARY 2022 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES

e subsidy rate that CBO uses for its baseline budget

projections is calculated using the measures for the cost

of federal credit programs specied in the Federal Credit

Reform Act (FCRA).

For this analysis, CBO also estimated Ginnie Mae’s

FCRA subsidy rate under a scenario of severe economic

stress. at scenario is meant to illustrate the risks that

Ginnie Mae could be exposed to in a major recession.

ose risks include the additional uncertainty stem-

ming from the recent changes to the types of mortgages

included in Ginnie Mae–guaranteed MBSs. In CBO’s

baseline, which represents average economic conditions,

Ginnie Mae’s new guarantees in 2022 are projected to

produce budgetary savings of $2.2 billion in that year

(on a FCRA basis). But under the stress scenario, those

guarantees would have a budgetary cost of $3.0 billion

in2022, CBO estimates.

Estimating the Volume of Guarantees

For each of the 10 years of its baseline budget projec-

tions, CBO uses its macroeconomic forecast to estimate

the total value of mortgages expected to be originated in

a given year. On the basis of that projection for the entire

single-family mortgage market—including mortgages

that meet the criteria for a government guarantee and

Box 2 .

Possible Changes to Ginnie Mae’s Role From a Restructuring of the

HousingFinanceSystem

Policymakers’ interest in Ginnie Mae extends beyond the

rapid growth of its guarantees on mortgage-backed securi-

ties (MBSs) and the shifts in the types of loans and ﬁnancial

institutions covered by those guarantees. One particular area

of focus has been the role that Ginnie Mae might play in the

mortgage markets as a part of a broader restructuring of the

U.S. housing ﬁnance system. Members of Congress and market

participants have discussed such restructuring since 2008,

when the federal government assumed control of Fannie Mae

and Freddie Mac, government-sponsored enterprises (GSEs)

that are central to the housing ﬁnance system. Not all propos-

als for restructuring include a modiﬁed role for Ginnie Mae, but

most recognize that changes to the GSEs might also require

the Federal Housing Administration (FHA), the Department

of Veterans Aairs (VA), the Rural Housing Service (RHS), and

Ginnie Mae to adapt to those changes.

A number of proposals for altering the housing ﬁnance system

would extend Ginnie Mae’s guarantees to MBSs that contain

mortgages currently guaranteed by the GSEs—that is, mort-

gages without a primary government guarantee.

Under such

proposals, Ginnie Mae would continue to guarantee the timely

payment of principal and interest to MBS investors, much as

1. See Michael Bright and Ed DeMarco, Toward a New Secondary Mortgage

Market (Milken Institute, September 2016), https://tinyurl.com/3ekfzs48; and

statements by witnesses at a hearing of the House Committee on Financial

Services titled “A Legislative Proposal to Provide for a Sustainable Housing

Finance System: The Bipartisan Housing Finance Reform Act of 2018”

(December 21, 2018), https://tinyurl.com/ywjk328w.

it does today. The main dierence would be that private ﬁrms

would provide the capital necessary to protect Ginnie Mae

against the sorts of losses that FHA, VA, and RHS cover under

their guarantee programs. That private capital could take many

forms, similar to the approach that the GSEs use in their exist-

ing credit-risk-transfer transactions.

With such a change, Ginnie Mae would need to take several

steps to address the additional risks involved in its expanded

guarantees. First, it would need to acquire the data and

expertise to assess and manage the riskiness of the private

ﬁrms whose capital would substitute for a primary government

guarantee. Second, it would need to determine whether exist-

ing systems and personnel could handle the added volume

associated with a larger group of issuers and mortgages.

Third, it might need to reassess its current guarantee fees and

servicing requirements to ensure that they were sucient to

safeguard taxpayers from the new risks. Ginnie Mae might be

able to use the expertise of the GSEs’ regulator, the Federal

Housing Finance Agency, to help it manage its expanded role

under such proposals.

2. For a description of the credit-risk-transfer activities of Fannie Mae and

Freddie Mac, see Congressional Budget Oce, Transferring Credit Risk on

Mortgages Guaranteed by Fannie Mae or Freddie Mac (December 2017),

www.cbo.gov/publication/53380.

3. For a discussion of Ginnie Mae’s current stang levels and risk

management procedures, see Government Accountability Oce, Ginnie

Mae: Risk Management and Stang-Related Challenges Need to Be

Addressed, GAO-19-191 (April 3, 2019), www.gao.gov/products/gao-19-191.

10 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES JANUARY 2022

those that do not—CBO allocates shares to the guaran-

tee programs of Fannie Mae, Freddie Mac, FHA, VA,

and RHS.

e allocations are based on those programs’

past shares of the mortgage market and any implemented

or scheduled changes in law or policy that might aect

future shares, such as changes in a program’s guarantee

fees.

CBO then uses its projections of the volume of guar-

antees by FHA, VA, and RHS to project the volume of

guarantees by Ginnie Mae. at estimate is based on

the share of mortgages from each primary government

guarantor that have been part of Ginnie Mae–guaranteed

MBSs in recent years and any announced changes to

Ginnie Mae’s securitization programs.

On the basis of

that analysis, CBO estimates that in 2022, Ginnie Mae

will guarantee more than 90 percent of FHA-backed

loans and 98 percent of VA- and RHS-backed loans.

(Lenders are expected to hold the rest of those loans in

their portfolios rather than pooling the mortgages into

MBSs.) In CBO’s July 2021 baseline, those percentages

are projected to result in a total of $577 billion in new

Ginnie Mae MBS guarantees in 2022.

Estimating the Subsidy Rate on

GinnieMae’sGuarantees

e Federal Credit Reform Act requires that the impact

of Ginnie Mae’s new MBS guarantees each year—Ginnie

Mae’s subsidy cost—be recorded in the federal budget

on a present-value basis. (A present value is a single

number that expresses a ow of income or payments in

terms of an equivalent lump sum received or paid at a

particular point in time.) at subsidy cost is calculated

as the dierence between the present value of the losses

that Ginnie Mae is expected to incur on a given year’s

cohort of newly guaranteed MBSs over their lifetime and

the present value of the guarantee fees that Ginnie Mae

expects to collect on those guarantees over their lifetime.

19. See Congressional Budget Oce, “Details About Baseline

Projections for Selected Programs: Federal Programs

at Guarantee Mortgages” (July 2021), https://tinyurl.

com/5x9w63j2.

20. e annual appropriation act that provides funding for Ginnie

Mae sets a limit on the dollar volume of Ginnie Mae’s guarantees.

In recent years, the limit has been set high enough to not

constrain Ginnie Mae’s ability to meet its MBS issuers’ demand

for guarantees. at limit does not aect CBO’s projections

because, in recent years, it has been higher than CBO’s projection

of the volume of new guarantees.

For Fannie Mae, Freddie Mac, FHA, and other large

federal credit programs, CBO uses its own models to

estimate subsidy rates on a FCRA basis for its base-

line projections. For Ginnie Mae, however, CBO uses

the estimated FCRA subsidy rate published in the

Administration’s Federal Credit Supplement.

CBO does

not model Ginnie Mae’s guarantee programs, because

of a lack of data about the past performance of MBS

issuers and the relatively small budgetary cost of those

programs.

In the Federal Credit Supplement for scal year 2021,

Ginnie Mae is projected to have a FCRA subsidy rate of

−0.38 percent in 2022—meaning that the present value

of projected losses on new guarantees made in 2022 is

smaller than the present value of the fees that Ginnie

Mae is projected to collect in exchange for providing

those guarantees. Programs with negative subsidy rates

produce savings for the federal budget.

e Administration’s estimate of Ginnie Mae’s FCRA

subsidy rate is based on four sets of cash ows: defaults,

recoveries, fees, and miscellaneous items.

•

Defaults. e losses that Ginnie Mae incurs from

mortgage defaults are a function of the number

of MBS issuers that fail to meet their obligations,

the number of mortgages in those failed issuers’

MBSs that go into delinquency or default, and the

losses experienced on those defaults (see Figure 4).

Delinquent and defaulted loans in failed issuers’

MBSs result in cash outows from Ginnie Mae for

several reasons. First, Ginnie Mae must forward the

scheduled monthly principal and interest payments

to MBS investors for failed issuers’ delinquent

mortgages that have not yet been removed from

(bought out of) an MBS.

Second, Ginnie Mae

must repay the remaining principal to MBS

investors for failed issuers’ defaulted mortgages that

have been bought out of an MBS. ird, it must

cover maintenance costs for properties associated

with defaulted mortgages until those properties

21. See Oce of Management and Budget, Budget of the U.S.

Government, Fiscal Year 2022: Federal Credit Supplement (May

2021), www.whitehouse.gov/omb/supplemental-materials.

22. If, instead of servicing the loans of failed issuers itself, Ginnie

Mae transferred the servicing duties to a solvent issuer, it

would have little or no cash outow. Alternatively, if Ginnie

Mae retained the servicing obligation and hired a third-party

subservicer to carry out those duties, it would have cash outows

to pay the subservicer.

11JANUARY 2022 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES

can be foreclosed on or transferred to another

party. In the Administration’s 2022 FCRA subsidy

estimate—which reects the average eects of each

of Ginnie Mae’s potential resolution options for

addressing a failed issuer—Ginnie Mae’s outows

for delinquencies and defaults are projected to equal

0.19percent of the original principal balance of all

MBSs newly guaranteed by Ginnie Mae in 2022.

•

Recoveries. After Ginnie Mae steps in to assume

the obligations of failed issuers, it receives cash

inows from several sources: repayment of forwarded

principal and interest payments for delinquent

loans; recoveries after a loan is modied or a home

is foreclosed on or transferred; claim payments from

FHA, VA, and other primary government guarantors

for defaulted mortgages in failed issuers’ MBSs; and

miscellaneous reimbursements from those guarantors.

In the Administration’s 2022 FCRA subsidy estimate,

Ginnie Mae is expected to recover 96 percent of its

outows for delinquencies and defaults. On the basis

of those default and recovery estimates, the present

value of default costs, net of recoveries, is projected to

equal 0.01 percent of the original principal balance of

all MBSs newly guaranteed in 2022.

•

Fees. Ginnie Mae also receives cash inows from

the guarantee fee it charges solvent issuers (set at

0.06percent of the outstanding balance of an MBS).

In the Administration’s subsidy estimate, those fee

collections are projected to have a present value in

2022 equal to −0.37 percent of the original principal

balance of all MBSs newly guaranteed in that year.

•

Miscellaneous Cash Flows. Ginnie Mae’s activities

produce a number of other cash ows that are not

directly related to defaults, recoveries, or fees. ose

cash ows—which are associated with guarantees on

multifamily mortgages, reverse mortgages, and VA

mortgages to service members—represent a small part

of Ginnie Mae’s subsidy cost. In the Administration’s

2022 FCRA estimate, those cash ows are

projected to have a present value of −0.02percent

of the original principal balance of all MBSs newly

guaranteed in that year.

Figure 4 .

Representation of Ginnie Mae’s Losses as a Share of Its Annual Guarantees

Guarantees on

Defaulted Mortgages

From Failed Issuers

Guarantees on

Mortgages From

Failed Issuers

MBS Guarantees

on Mortgages

From All Issuers

Losses on Defaulted

Mortgages From

Failed Issuers

Data source: Congressional Budget Oce.

MBS = mortgage-backed security.

12 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES JANUARY 2022

Although FCRA estimates are used in the federal budget

for most credit programs, including Ginnie Mae’s, CBO

also frequently prepares fair-value estimates for credit

programs to provide a more comprehensive picture of

the programs’ long-term costs.

e fair-value approach

recognizes that, in the private sector, uncertain cash

ows that grow or shrink along with the economy are

less valuable than cash ows that are stable regardless of

economic conditions. us, fair-value estimates account

for market risk, which is the element of nancial risk

that is correlated with overall economic conditions (and

that therefore cannot be eliminated by diversifying a

portfolio of investments). For assets, such as loan guaran-

tees, that are more likely to go into default when eco-

nomic conditions are poor, fair-value estimates discount

the value of future cash ows at a higher rate than the

interest rates on Treasury securities, which are consid-

ered risk-free. ose fair-value estimates show lower

savings than present-value estimates made using the

method prescribed for federal loan programs by FCRA,

which involves discounting future cash ows at Treasury

interestrates.

CBO publishes a fair-value subsidy rate for Ginnie Mae

as part of its fair-value estimates for various federal credit

programs. CBO projects that in 2022, the fair-value

subsidy rate for Ginnie Mae will eectively be zero—

meaning that Ginnie Mae’s guarantee programs will not

produce any budgetary costs or savings when measured

on a fair-value basis.

Estimating the FCRA Subsidy Rate

UnderaStressScenario

e cash ows that the Administration uses to estimate

Ginnie Mae’s FCRA subsidy rate are based on a pro-

jection of how the MBSs that Ginnie Mae is expected

to guarantee in 2022 will perform on average. at

projection is based on data about the past performance

of Ginnie Mae–guaranteed MBSs and their issuers, as

well as the Administration’s forecast of future economic

conditions. e Administration’s subsidy rate estimate

represents an average of expected defaults, recoveries,

fees, and other cash ows across a range of scenarios and

economic outlooks.

23. See Congressional Budget Oce, Estimates of the Cost of

Federal Credit Programs in 2022 (October 2021), www.cbo.gov/

publication/57412.

24. Ibid.

For this analysis, CBO adjusted the Administration’s esti-

mates of average cash ows to calculate a FCRA subsidy

rate for Ginnie Mae under a scenario of economic stress.

at scenario, which reects a severe recession, represents

the worst 1 percent of economic outcomes that CBO

models over the coming decade.

Although CBO does not have detailed performance data

about the MBSs underlying Ginnie Mae’s cash ows, it

can consider the factors that would inuence the issu-

ers and mortgages in Ginnie Mae’s guarantee programs

under a stress scenario. For example, CBO can use its

models of FHA’s and VA’s loan guarantee programs to

project how mortgage cash ows might vary under dier-

ent future economic conditions.

CBO used those mod-

els for this analysis to develop projections of defaults,

prepayments, and recoveries on the mortgages that make

up Ginnie Mae–guaranteed MBSs (see Table 1). In addi-

tion, CBO analyzed failure rates for thrift institutions

insured by the Federal Deposit Insurance Corporation

(FDIC) to estimate how much the failure rate for MBS

issuers might rise under a stress scenario.

How CBO Developed the Stress Scenario. e default,

prepayment, and recovery rates in the stress scenario are

based on results from CBO’s FHA model. at model

uses 1,000 combinations of macroeconomic variables

(such as interest rates, home prices, and unemployment

rates) to simulate future economic conditions. On the

basis of those conditions and the portfolio of mortgages

that FHA is expected to guarantee, the model generates a

series of cash ows—representing mortgage repayments,

mortgage defaults, and recoveries on those defaults—for

each period from a loan’s origination to its repayment or

default for each of the 1,000 paths for economic con-

ditions. To calculate the FCRA subsidy rate for FHA,

CBO converts those cash ows to present values by dis-

counting them back to the origination date of each loan

using the appropriate FCRA discount rate.

25. See Francesca Castelli and others, Modeling the Budgetary Costs of

FHA’s Single Family Mortgage Insurance, Working Paper 2014-05

(Congressional Budget Oce, September 2014), www.cbo.gov/

publication/45711; and Congressional Budget Oce, e Role

of the Department of Veterans Aairs in the Single-Family Mortgage

Market (September 2021), www.cbo.gov/publication/57024.

26. ose discount rates are the interest rates on Treasury securities

of comparable maturity. For example, the projected yield on

Treasury securities maturing in two years is used to discount

cash ows two years from the loan origination date, a three-year

Treasury rate is used for cash ows three years from origination,

and so on.

13JANUARY 2022 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES

Although the FHA subsidy rate that CBO publishes

is the average rate across all 1,000 paths for economic

conditions, the model produces a subsidy rate for each

path. For this analysis, CBO ranked the 1,000 paths by

subsidy rate, from lowest to highest. e severe economic

stress scenario is dened as the set of average cash ows

from the 10 paths with the highest subsidy rates.

ose 10 highest subsidy rates result from a set of projec-

tions for interest rates, home prices, and unemployment

rates that would lead to very high default rates and low

recoveries on FHA-insured mortgages. For example,

in the 10 paths, nominal home prices are projected to

decline by a total of 21 percent, on average, over the

rst ve years of the projection and by 38 percent over

10years. In comparison, average home prices declined

by a total of 20 percent over the ve years from 2007

to 2012 (which included the nancial crisis), before

rebounding to show total growth of 4 percent over the

10-year period from 2007 to 2017.

27. ose gures for actual changes in home prices are based on the

Federal Housing Finance Agency’s monthly, purchase-only, and

Projected Cash Flows in the Stress Scenario. Using

the results from the stress scenario, CBO adjusted the

Administration’s estimates of average cash ows for

Ginnie Mae to develop a set of cash ows representing

a severe recessionary environment for Ginnie Mae. e

scale of the adjustments that CBO made depended on

the category of cash ows—defaults, recoveries, or fees.

(CBO did not adjust miscellaneous cash ows for the

stress scenario because of their negligible eect on Ginnie

Mae’s subsidy rate.)

Defaults. CBO used two multipliers to adjust the

Administration’s estimate of Ginnie Mae’s annual cash

outows for delinquencies and defaults. e rst mul-

tiplier is based on defaults in the 10 paths with the

highest subsidy rates from CBO’s FHA model (the stress

scenario). e second multiplier is derived from CBO’s

analysis of FDIC data on failure rates for thrift institu-

tions. By looking at the share of thrifts that failed in each

year from 1934 to 2016, CBO developed an estimate

of the share of Ginnie Mae issuers that would fail in a

severe recession.

Together, those two multipliers—which were adjusted

to reect the correlation between mortgage defaults

and failures of nancial institutions—increase the

Administration’s estimate of default-related cash ows

20-fold for the stress scenario. As a result, Ginnie Mae’s

estimated cash outows in 2022 for delinquent and

defaulted loans in failed issuers’ MBSs, as a share of

the original balance of all MBSs newly guaranteed by

Ginnie Mae in 2022, increase from 0.19 percent in

the Administration’s subsidy estimate (which is used in

CBO’s baseline) to 3.76 percent under CBO’s severe

stress scenario (see Table 2).

Recoveries. e Administration calculates Ginnie Mae’s

cash ows from recoveries as a share of its cash out-

ows for delinquent and defaulted mortgages in failed

issuers’ MBSs. us, the rst step in CBO’s estimate

of recoveries in a severe recession was to increase the

Administration’s estimate of average recovery cash ows

by the same 20-fold multiplier used to adjust defaults.

not seasonally adjusted house price index. See Federal Housing

Finance Agency, “House Price Index Datasets” (accessed October

26, 2021), https://tinyurl.com/cy6bjtby.

28. In CBO’s judgment, thrifts operating during the 1934–2016

period are a good proxy for the risks associated with nonbank

institutions’ increased participation in Ginnie Mae’s MBS

programs today.

Table 1 .

Data Sources That CBO Used to Estimate

Ginnie Mae’s Cash Flows Under a

StressScenario

Variable

Source of Projection

for the Stress Scenario

Default Rates for MBS

Issuers

Analysis of data from the Federal Deposit

Insurance Corporation and the Bureau of

Economic Analysis

Default Rates for

Mortgages

Simulations from CBO’s model of FHA’s

insurance program for single-family

mortgages

Prepayment Rates for

Mortgages

Simulations from CBO’s model of FHA’s

insurance program for single-family

mortgages

Recoveries on Defaulted

Mortgages

Simulations from CBO’s model of FHA’s

insurance program for single-family

mortgages

Analysis of losses on FHA-insured mortgages

that would exceed the guarantee percentage

on VA-guaranteed mortgages

Data source: Congressional Budget Oce.

FHA = Federal Housing Administration; MBS = mortgage-backed security;

VA = Department of Veterans Aairs.

14 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES JANUARY 2022

CBO further adjusted recovery cash ows to reect the

expectation that home prices would decline in a severe

recession, resulting in greater default losses. In particular,

mortgages guaranteed by VA would be expected to incur

losses in excess of VA’s partial guarantee, resulting in

costs to Ginnie Mae (in its role as a replacement for the

failed issuer). CBO estimated the size of those additional

losses by determining the projected losses on FHA-

insured loans under the stress scenario that would exceed

the amount covered by a VA guarantee and then apply-

ing that estimate of excess losses to the expected share of

VA-guaranteed loans in Ginnie Mae–guaranteed securi-

ties. at estimate reects the lower expected default rate

on mortgages guaranteed by VA than on loans insured

byFHA.

In the stress scenario, those adjustments reduce the

Administration’s estimate of Ginnie Mae’s recovery cash

ows by 28 percent. As a result, Ginnie Mae is projected

to recover 70 percent of its outows for delinquencies and

defaults in 2022 under CBO’s severe stress scenario, com-

pared with 96 percent in the baseline subsidy estimate.

With those default and recovery estimates, the present

value of default costs, net of recoveries, would equal

1.07percent of the original principal balance of all

MBSsnewly guaranteed in 2022 under CBO’s severe

stress scenario, compared with 0.01 percent in the

baseline subsidy estimate.

Table 2 .

Estimates of Ginnie Mae’s Cash Flows and Budgetary Cost in 2022

UnderCBO’sBaselineand a Stress Scenario

CBO’s Baseline Severe Economic Stress Scenario

Ginnie Mae’s Cash Flows From MBSs Newly Guaranteed in 2022

Lifetime default costs (Percentage of original principal

balance of MBSs) 0.19 3.76

Recoveries on defaulted mortgages (Percentage of

default costs) 96.17 69.72

Present value of net default costs (Percentage of

original principal balance of MBSs) 0.01 1.07

Present value of income from guarantee fees

(Percentage of original principal balance of MBSs) -0.37 -0.52

Present value of miscellaneous cash ows

(Percentage of original principal balance of MBSs) -0.02 -0.02

Ginnie Mae’s Subsidy Rate (Per dollar of new guarantees) -0.38 0.53

Ginnie Mae’s Subsidy Cost (Billions of dollars) -2.2 3.0

Data source: Congressional Budget Oce, using data from Oce of Management and Budget, Budget of the U.S. Government, Fiscal Year 2022: Federal Credit

Supplement (May 2021), www.whitehouse.gov/omb/supplemental-materials. See www.cbo.gov/publication/57176#data.

MBSs = mortgage-backed securities.

a. This scenario represents the worst 1 percent of economic outcomes that CBO models over the coming decade. It represents a severe recession that includes

higher-than-expected failure rates among issuers of Ginnie Mae–guaranteed MBSs and larger-than-expected losses on the mortgages underlying those

securities. CBO based the stress scenario on its model of the Federal Housing Administration’s (FHA’s) mortgage guarantee programs. That model uses

1,000 combinations of dierent values for major macroeconomic variables to simulate future economic conditions and projects FHA’s cash ﬂows for loan

guarantees under those diering conditions. CBO deﬁned the stress scenario as the 10 out of those 1,000 sets of economic conditions that produced the

highest estimated subsidy rates for FHA’s loan guarantees (and thus presumably for Ginnie Mae’s guarantees of MBSs composed of loans guaranteed by FHA

and other federal agencies).

b. CBO did not adjust miscellaneous cash ﬂows for the stress scenario because of their negligible eect on Ginnie Mae’s subsidy rate.

15JANUARY 2022 GINNIE MAE AND THE SECURITIZATION OF FEDERALLY GUARANTEED MORTGAGES

Fees. CBO adjusted the Administration’s estimate of

annual cash ows from Ginnie Mae’s guarantee fees for

the stress scenario to reect the expected dierence in

borrowers’ voluntary prepayments of mortgages. Under

the economic conditions implied by the stress scenario,

borrowers would voluntarily prepay their mortgages

more slowly—driven in part by declining home prices

and tighter lending standards for renancing loans—

leaving higher outstanding mortgage balances, which

would generate more fee income for Ginnie Mae. As

it did with recoveries, CBO used results from its FHA

model to estimate the size of that adjustment.

In the stress scenario, the adjustment for slower prepay-

ments increases the Administration’s estimate of cash ows

from guarantee fees by 42 percent. As a result, Ginnie Mae’s

fee income in 2022 is projected to have a present value of

−0.52 percent of the original balance of all MBSs newly

guaranteed in that year under the stress scenario, compared

with −0.37 percent in the baseline subsidy estimate.

Estimates of Ginnie Mae’s Budgetary Costs

Using the Administration’s estimates of cash ows for

Ginnie Mae, CBO projects in its July 2021 baseline

that Ginnie Mae’s outows in 2022 for delinquent

and defaulted loans in failed issuers’ MBSs will equal

0.19 percent of the original principal balance of the

new MBSs that Ginnie Mae will guarantee in 2022.

Recoveries on those defaults are projected to equal

96percent, leaving net losses to Ginnie Mae equal to

0.01 percent of guarantees. Fees collected on those

guarantees (equal to −0.37 percent) and miscellaneous

cash ows (equal to −0.02 percent) more than oset

losses, resulting in an estimated FCRA subsidy rate of

−0.38percent for 2022 (see Table 2). Because CBO pro-

jects that Ginnie Mae will guarantee $577 billion in new

MBSs in 2022, the budgetary impact of those guarantees

is estimated to be a savings of $2.2 billion under the

baseline.

Ginnie Mae’s estimated subsidy rate is higher under the

scenario of severe economic stress that CBO constructed

for this analysis because of the changes to defaults, recov-

eries, and fee income described above. With defaulted

mortgages from failed issuers increased and recoveries

decreased, net losses to Ginnie Mae in 2022 under the

stress scenario would equal 1.07 percent of the original

principal balance of MBSs newly guaranteed in that year.

Although fee income would increase to −0.52 percent

of guarantees, that increase would not be sucient to

oset the larger losses, resulting in a FCRA subsidy rate

of 0.53 percent under the stress scenario. Given CBO’s

projection of $577 billion in new Ginnie Mae guarantees

in 2022, the budgetary impact of those guarantees would

be a cost of $3.0 billion under the stress scenario—an

increase of $5.2 billion from CBO’s baseline.

e estimates that Ginnie Mae’s net losses (on a FCRA

basis) would equal 0.01 percent of guarantees on average

and 1.07 percent in a stress scenario that has a 1 percent

chance of occurring over the coming decade suggest

that Ginnie Mae would eectively incur no losses in the

99percent of economic scenarios not covered by CBO’s

stress scenario.

at estimate is consistent with Ginnie

Mae’s past performance, including during and after the

nancial crisis of 2008.

CBO did not estimate losses in the stress scenario under

the fair-value approach, but the results would follow a

similar pattern: Ginnie Mae would be expected to incur

few or no losses in the majority of economic scenarios

and much higher losses in the stress scenario. e main

dierence from the FCRA estimates is that Ginnie Mae’s

net losses in the stress scenario would probably be much

higher under the fair-value approach.

29. e stress scenario described here would probably also increase

the costs associated with Ginnie Mae’s guarantees of MBSs issued

before or after 2022. us, the total cost increase resulting from

that scenario would exceed the $5.2 billion associated with new

Ginnie Mae guarantees in 2022.

30. Although CBO did not calculate Ginnie Mae’s net losses

in scenarios other than the one with a 1 percent chance of

occurring, the average for 99 paths with no net losses and 1 path

with net losses of 1.07 percent is net losses equal to 0.01 percent.

31. According to Ginnie Mae’s annual reports, since 2007 the

corporation’s posted revenues have exceeded its expenses every

year except 2019. (In that year, a large write-down in the value

of Ginnie Mae’s future fee income from its guarantees, driven

by market conditions and by modeling and accounting changes,

caused the corporation to post an operating loss.) Any revenues

it earns that exceed those costs are used to accumulate a capital

reserve, which is held as cash by the Treasury or invested in

Treasury securities. See Ginnie Mae, “Annual Reports” (accessed

September 28, 2021), https://tinyurl.com/3bhpmybv.

List of Tables and Figures

Figures

1. The Role of Ginnie Mae in the Market for Mortgage-Backed Securities 3

2. Ginnie Mae’s Cash Flows, by Financial Condition of MBS Issuer 4

3. Amount of New Mortgage-Backed Securities Guaranteed by Ginnie Mae,

CalendarYears 2000 to 2020, by the Mortgages’ Primary Guarantor 6

4. Representation of Ginnie Mae’s Losses as a Share of Its Annual Guarantees 11

Tables

1. Data Sources That CBO Used to Estimate Ginnie Mae’s Cash Flows Under a StressScenario 13

2. Estimates of Ginnie Mae’s Cash Flows and Budgetary Cost in 2022

UnderCBO’sBaselineand a Stress Scenario 14

About This Document

e Congressional Budget Oce prepared this report in fulllment of its eorts to be more

transparent. In keeping with CBO’s mandate to provide objective, impartial analysis, the report

makes no recommendations.

Mitchell Remy prepared the report with guidance from Sebastien Gay. Nabeel Alsalam,

MichaelFalkenheim, Paul B. A. Holland, Erik O’Donoghue, Jerey Perry, Robert Reese,

AuroraSwanson, David Torregrosa, and Susan Willie oered comments.

Michael Bright of the Structured Finance Association, Ed DeMarco and Angel Hernandez of the

Housing Policy Council, Laurie Goodman of the Urban Institute, Karen Pence of the Board of

Governors of the Federal Reserve System, and Mark Willis of New York University’s Furman Center

commented on an earlier draft. e assistance of external reviewers implies no responsibility for the

nal product; that responsibility rests solely with CBO.

Mark Doms, Jerey Kling, and Robert Sunshine reviewed the report. Christian Howlett edited it,

and Jorge Salazar created the graphics and prepared the text for publication. e report is available at

www.cbo.gov/publication/57176.

CBO seeks feedback to make its work as useful as possible. Please send any comments to

[email protected]v.

Phillip L. Swagel

Director

January 2022