Following grumblings from some servicers and industry trade groups, Ginnie Mae on Tuesday issued a statement that most nonbank mortgage companies it does business with will be able to comply with its upcoming — and controversial — capital rule requirements.
“While the overwhelming majority of Ginnie Mae issuers are compliant with these requirements today, we will continue engaging with our issuers throughout the implementation period,” Ginnie President Alanna McCargo said in a statement.
In the form of an FAQ, Ginnie Mae published answers related to a 250% risk weight for mortgage servicing rights, as well as liquidity requirements that critics say unfairly treat nonbanks like depositories, not finance companies.
Ocwen, one of the country’s largest Ginnie Mae servicers, has already expressed concern that it will not be able to meet the requirements. Similarly, the Community Home Lenders Association has expressed worry that the new requirements will cause harm to nonbanks, which account for more than 91% of all Ginnie Mae forward originations.
“Just as the previous regime drove banks away, the Biden administration is on the verge of driving nonbank mortgage servicers away from Ginnie Mae altogether,” Dave Stevens, the former FHA commissioner under Obama, wrote in an opinion piece for HousingWire. “At minimum, the changes put forth in the new rule are so punitive that either costs will rise, and thus interest rates for borrowers will, or some/many current Ginnie Mae servicers will opt to leave the program altogether.”
In its FAQ, Ginnie answered a question about using “Basel-type capital tools” to address nonbank liquidity risk. “We are attempting to ensure that balance sheets containing large concentrations of Mortgage Servicing Rights (“MSRs”) are adequately capitalized, and that the widely varying risk characteristics of different balance sheet items are incorporated into capital standards that until now have not considered them,” Ginnie said, noting that the MSR market is “opaque” and MSR values are highly volatile.
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“In a rapidly declining market, precisely when funding needs are at their highest, these terms could lead to margin spirals and significant MSR write downs,” the government bond insurer said. “Because of the inherent importance of leverage in non-bank balance sheets, this constitutes a direct threat to liquidity and stability.”
Ginnie 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 capital for excess MSRs. This has caused significant consternation, with critics saying the policy doesn’t match the risk.
Government loans and conforming loans held for sale would have a 20% risk weight. Other loans held for sale would have a 50% risk weight. The compliance date for the requirement is December 2023.
In defending the policy, Ginnie Mae said it believes that a “risk-based approach without a deduction of ‘Excess MSRs’ is inadequate. With only a 6% capital requirement and a 250% risk weight, Independent Mortgage Banks (IMBs) could theoretically borrow 85 cents on the dollar [(100% – (250% x 6%)) = 85%] against MSRs without limit. Through the addition of a risk-based capital requirement, Ginnie Mae seeks to limit that exposure to ensure long-term viability for all of our Issuers.”
In its FAQ, Ginnie asks one to “consider an IMB with MSRs that are valued at 3x their net worth. In the event the MSRs are marked down by 25% in a single quarter, all other things being equal, the mortgage bank’s total equity capital would decline by 75% (ignoring the impact of taxes). In this example, the Issuer would likely experience a margin spiral or other demands on their liquidity, resulting in further write downs of assets that could render them insolvent in a very short period.”
Ginnie said 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.”