Ginnie Mae rule is the ‘elephant in the room’ for the MSR market 

Executives are concerned that the new risk-based capital requirement rule will have big impacts on the market

Mortgage industry executives are echoing the sentiment that Ginnie Mae’s risk-based capital requirement is currently the main concern for companies holding mortgage servicing rights (MSR). According to industry leaders, the rule can force a sell-off wave, reduce values and put some lenders and services in a difficult spot.

“That’s the ‘elephant in the room’ right now. Obviously, it’s been delayed. But, to date, it’s not been altered,” said Michael Carnes, managing director of the MSR Valuation Group at the Mortgage Industry Advisory Corporation (MIAC).

The executive spoke during a panel at the 8th Annual Residential Mortgage Servicing Rights Forum, a conference held in Manhattan on November 14 and 15. 

The risk-based capital requirement — which reduced the minimum risk-based capital ratio from 10% to 6% but put a 250% risk weight on the MSR asset and the dollar-for-dollar deduction from the capital for excess MSRs — was set to go into effect at the end of 2023.

But in late October, Ginnie Mae announced that it had extended the mandatory implementation date for nonbanks to Dec. 31, 2024.

The new rule has caused significant consternation, with critics stating that the policy doesn’t match the risk. Government and conforming loans held for sale would have a 20% risk weight. Other loans held for sale would have a 50% risk weight.

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During the MSR Forum, executives said they are not opposed to having an additional capital requirement, but there’s no prior loss history to justify the 250% risk weight on the MSR asset. 

What to expect 

In response to the critics, Ginnie said in a statement that if the new capital rule were in effect today, “95% of our Issuers (by count) would be compliant. Of those issuers already compliant with RBCR, many have ample equity capital to support the acquisition of MSRs that may come on the market.”

Executives refute this explanation. According to John Bosley, president of mortgage lending at Planet Home Lending, the idea that 95% of firms will qualify for the new risk-based capital rule is a “little bit disingenuous.” 

According to Bosley, the top 20 or 25 issuers control most of Ginnie Mae’s servicing, and banks are already not excited about servicing these loans. 

“You take a few of those (20 or 25 issuers) out of the mix, and you’re down 10%, 20%, or 30% (compliant),” he said. “It’s a scary situation.”

Taylor Stork, chief operating officer at Developer’s Mortgage Company, said that the estimates regarding 95% of lenders being compliant with the rule were based on financials from a quarter ago, and rates have moved substantially since then.

“The other piece of that: We know that there are 11 companies that fundamentally would not be gracious. What are those 11 companies going to do? They’re going to sell MSRs,” Stork said. “And what happens when they sell it? They will depress it (the market). What happens when it starts to go down? Everybody else’s ratio changes. So, who’s number 12? Who is number 13?”

Bosley gave an estimate on the impact, stating: “When we ran the math on what the rule could potentially do to the MSR market, we think it could cause MSR values to drop by 10% to 20% in a normal market.”

The current MSR market  

Rising interest rates and lower prepayment speeds increased MSR multiples in 2022, but there have been signs of relief in recent weeks.

“The MSR market softened considerably,” said Carnes. “What was a 5.5 multiple market is now, generally speaking, a 4.8 multiple market. This is predominantly for the 2020 and 2021 origination, as we are still not seeing a significant amount of the 6% product trading.” 

A multiple is a measure of the price of an MSR loan pool, which is expressed as a percentage of the unpaid principal balance divided by the servicing fee.

According to MIAC, in the first half of 2022, agency MSRs sales of more than $2 billion — mostly from 2020 and 2021 originations — transacted at multiples above 5.25 times. Meanwhile, Ginnie Mae’s MSRs, representing higher risks, were trading at 4 times higher.

“It seems that once you get that 200 basis points out of the money to a multiple of 4.8 times, the levels start to flatten out a bit,” Carnes said.  

The number of bids has also improved recently. During the first and second quarters, 20 to 24 buyers would show interest in a $5 million MSR auction, resulting in 12 bids on average. After that, it was reduced to three or four bids per auction due to bandwidth constraints, budgetary constraints, capital constraints, etc. 

Carnes said it has now improved to six to seven bids per auction. 

“We’ve seen some folks out there, from both sides, coming back around to test the waters,” said Jay Patel, managing director at Blue Water Financial Technologies.

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