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CFPB / RegulatoryMortgage

FHFA gets blowback on proposed liquidity requirements

While the FHFA proposed heightened liquidity requirements, committed lines of credit would not count toward fulfilling them

During the market disruption in March 2020, the value of mortgage servicing rights became temporarily disconnected from mortgage rates.

Large mortgage sellers and servicers faced severe margin calls, and it took several weeks for them to get the go-ahead from the Federal Housing Finance Agency to draw on their liquidity buffers.

It’s a scenario that large nonbanks are hoping not to repeat.

“The point of [FHFA] asking them to have that liquidity is to make them more resilient in a stressful environment. The point of building up liquidity is to be able to use it,” said Ed DeMarco, president of the Housing Policy Council, which reps large nonbank mortgage lenders and servicers.

Industry stakeholders took to a virtual forum Monday afternoon to share their thoughts on proposed tweaks to criteria for Fannie Mae and Freddie Mac sellers and servicers, as well as a 2021 proposal by Ginnie Mae for its issuers.

Participants took it as a good sign that Ginnie Mae and the Federal Housing Finance Agency jointly hosted the event. The Conference of State Bank Supervisors — which regulates nonbanks at the state level — also participated in the session.

The FHFA proposed the raft of changes for GSE sellers and servicers in February. As conservator of the government-sponsored enterprises, FHFA does not regulate mortgage lenders. Its proposed criteria for Fannie Mae and Freddie Mac’s counterparties, however, would determine how they manage risk. Ginnie Mae issued its own proposed guidelines for its issuers in July 2021, but has not implemented them.

The FHFA proposed an additional liquidity buffer for large non-banks, which it said they could use “in times of financial or economic stress.” The Housing Policy Council asked FHFA to clarify exactly when those buffers could be used, and how they would be re-capitalized after the stressful event ends.

“Large nonbank seller/servicers need to understand the procedures for accessing the liquidity buffer before a crisis, not during one,” the Housing Policy Council wrote.

Emissaries from several industry trade groups also criticized a 200 basis point incremental liquidity charge that FHFA proposed on all to-be-announced hedging positions. The FHFA said the new requirement was a response to margin calls it observed in March 2020.

Scott Olson, executive director of the Community Home Lending Association, said the liquidity requirement was “out of the blue,” and would penalize smaller sellers and servicers. In a letter to the FHFA, CHLA said the requirement would harm consumers by increasing concentration and making the market less competitive.

“Many solvent smaller IMBs, facing big liquidity increases, will elect to simply sell their loans to aggregators instead of to the Enterprises,” CHLA wrote, which could result in “fewer consumer choices, less competition, and less personalized service.”

Other commenters argued the liquidity increases could also drive originators to manage risk less effectively.

Urban Institute researchers Karan Kaul and Laurie Goodman, and former Ginnie Mae president Ted Tozer, in a joint letter, said the new proposed liquidity requirements appeared to be “punitive.” They argued the extra liquidity charge would discourage hedging, and could push originators to use less effective hedging strategies.

“This is the opposite of what the FHFA wants,” Kaul, Goodman and Tozer wrote.

While the FHFA proposed heightened liquidity requirements for nonbanks, committed lines of credit would not count toward fulfilling them. Committed lines of credit  — which can include warehouse, servicer advance and mortgage servicing rights lines of credit — are governed by covenants between the financial institution and the borrower. Unlike uncommitted lines of credit, they cannot be rescinded without breaking the agreement.

If FHFA does not allow those committed lines of credit to count in some portion for the overall liquidity requirements, “Either there’s going to be a lot more warehousing of cash and cash equivalents, or lines are going to get drawn on rather than waiting,” said DeMarco.

In its comment letter, the trade group also highlighted that committed lines of credit performed well during the disruptions of early 2020.

Bob Broeksmit, president of the Mortgage Bankers Association, said it would be “problematic to eliminate recognition of committed lines of credit.” 

“They are durable in ways that uncommitted lines are not, and can only be withdrawn under certain conditions,” Broeksmit said.

A frequent criticism of the previous FHFA administration was its tendency to implement changes the mortgage industry viewed as abrupt. The caps on investment properties the agency implemented together with the U.S. Treasury in 2021 caught many in the mortgage industry off guard.

FHFA Acting Director Sandra Thompson has generally had a more deliberative stance. But, in a departure from that approach, the agency currently expects GSE sellers and servicers to implement its proposed changes to eligibility requirements within eight months.

That timeline did not win FHFA any points among industry stakeholders. The Housing Policy Council, along with the Mortgage Bankers Association and the Urban Institute, also asked FHFA to delay implementation of any changes by at least a year.

Currently, the FHFA envisions implementing the changes by December 2022.

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