Despite the Federal Housing Finance Agency’s proposed rules for minimum capital liquidity requirements for nonbank mortgage servicers, the industry will carry on with little impact. And according to a report from Fitch Ratings, it will remain unprofitable.
"The mortgage servicer business remains mostly monoline, cyclical, short-term wholesale funded, thinly profitable and subject to operational and regulatory risks," said Johann Juan, director of Financial Institutions, Roelof Slump managing director of RMBS and Matthew Noll, CFA, senior director of Financial Institutions with Fitch Wire, in the report “FHFA’s proposed Capital Rules Not a Panacea."
These characteristics limit the Issuer Default Ratings of mortgage servicers to below investment-grade levels, and the new capital and liquidity requirements do little to materially reduce the risk of default for mortgage servicers under stress.
Under the FHFA’s new proposal, all seller and servicers are required to have a minimum net worth base of $2.5 million plus 25 basis points of the total unpaid principal balance for the loans each nonbank services.
Additionally, the FHFA is also proposing that nonbanks must maintain a minimum capital ratio of tangible net worth equal to 6% the nonbank’s total assets.
There has been a lot of debate revolving around non-bank financial companies over the past year, in regards to developing regulations and supervisions that traditionally apply to insured depository institutions (IDIs).
The rules established are more meant to affect small, non-public non-depository institutions that have operated on the periphery in the sector, an FBR Capital Markets report said. “We believe covered, major financial companies like Nationstar (NSM) and Walter Investment (WAC) are well in excess of these new requirements at the servicer level.”
Smaller nonbank mortgage servicers may be incrementally challenged to meet the capital and liquidity requirements, but Fitch does not believe the minimums are sufficiently high so as to require material capital to be raised or drive increased industry consolidation.
“This reflects the FHFA's competing interests of promoting mortgage servicing stability via enhanced capital and liquidity requirements, while also promoting increased participation in the mortgage servicing market,” the report stated. “That said, the requirements may serve as an incremental competitive advantage to larger players, adding to the importance of scale in what is already a thin-margin business.”