Capital cushions





Only 10 more days for market input on new capital rules


Ginnie Mae has blindsided the market with its new proposed capital rules for non-bank lenders, which it also appears to want to implement before the end of the year, say sources.


The government agency announced a request for input (RFI)from interested parties by August 9 in a six-page document released on July 7. Not only is this a relatively short period, it coincides with summer months when offices are habitually less fully staffed.


“The process of developing this has been pretty opaque, but Ginnie Mae seems to be on a fast track as it wants comments in 30 days. My thinking is that it wants to implement a revision this year, although it may drop or revise the risk-based capital ratio based on pushback,” says Larry Platt, a partner who specialises in housing finance at law firm Mayer Brown.


The rules entail new net worth and liquidity requirements for all lenders, but what has put the cat among the pigeons is the proposed risk-based capital ratio floor of 10% for non-bank lenders. Moreover, in the calculation of the capital ratio, mortgage servicing requirements (MSRs) will be assessed according to a risk weighting of 250% - the same as for federally-chartered and FDIC-insured state-chartered banks.


While the larger mortgage servicers are likely to be able to meet the new requirements, it will have economic consequences. Meanwhile, the smaller servicers will have greater difficulty in implementing the new elevated capital buffer and may not be able to participate in the Ginnie Mae programme.

However, the most direct impact of the new rules will be upon the cost of mortgages, say market experts. “I don’t think the non-bank lender will lend less, but the risk-based capital requirement could affect prices and who holds the servicing or how much they hold,” says Platt.


For example, those lenders that have originated mortgages in-house for subsequent Ginnie Mae securitization may be inclined to sell the loans in the marketplace, along with the related servicing rights, rather than issuing its own Ginnie Mae securities and holding the related servicing rights, given the attendant higher capital requirements.


Moreover, those lenders executing flow purchases are likely to have to pass on the higher capital costs. So, the flow of product into the MBS market is unlikely to be affected, but the price the buyers are willing to pay for the servicing rights could well go down.


From one perspective, this is alien to the Biden administration’s aim to improve access to credit for disadvantaged communities, many of whom use non-bank lenders. Ginnie Mae is also part of the Department of Housing and Urban Development (HUD) and thus an arm of government. However, concern over the financial stability of participants in the Ginnie Mae programme has been evident for years.


Since the financial crisis, an increasing proportion of mortgage servicers providing loans guaranteed by Ginnie Mae have been non-bank lenders such as Lakeview, Mr Cooper and PennyMac. As of April 30, PennyMac, Lakeview and Freedom Home had a more than 30% share of loans in Ginnie Mae pools. Overall, some 70% of the top 30 servicers of loans in Ginnie Mae pools are non-banks, according to a June report by Ginnie Mae.


“There is nothing new about the concern. Non-banks aren’t subject to federal supervision as banks are and there is the worry among policy makers that non-bank servicers don’t have the financial strength to handle a downturn in the economy given their obligations to advance interest and principal payments to Ginnie Mae security holders,” says Platt..


In the six-page document released on July 7 Ginnie Mae explained the need for the new rules: “Ginnie Mae’s general view during this period has been that changing risk characteristics – such as the increased size of the guaranteed portfolio(s), the changing profile of the issuer base, and a greater systemic vulnerability to economic stress and liquidity shocks – have necessitated a more rigorous set of financial requirements than was in place during the GFC.”


But the proposals have aroused a firestorm of criticism and not only from non-bank lenders. Writing in Housing Wire yesterday (July 29), former ceo of the Mortgage Bankers’ Association David Stevens wrote, It is rare to see a regulator so afraid of its own programs as we are witnessing at Ginnie Mae. In an alarming move, Ginnie Mae has unleashed a plan that, if implemented, will significantly alter the mortgage markets and raise costs on loans that the majority of first-time homebuyers and minority homebuyers depend on.”


Peter Mills, the current senior vice president of residential policy at the MBA, also commented, “The risk-based provisions are entirely new and could adversely affect otherwise strong issuers.”


A spokesman for the MBA told SCI that “the MBA is collecting feedback from our members and will be responding to the RFI.”


Ginnie Mae has been unavailable for comment.


Another so far unexplored but potentially seismic consideration is whether these new rules augur a similar move by Freddie Mac and Fannie Mae. Perhaps ominously, Ginnie Mae in its July 7 paper notes it wishes “to align our requirements to the greatest degree possible with the other governmental bodies who regulate this area.”


Enhanced capital requirements for non-bank Ginnie Mae lenders have, however, found favour in some quarters. Writing this week, Clifford Rossi, professor at the Robert H Smith School of Business at the University of Maryland said, “Ginnie Mae’s proposal to strengthen liquidity and capital requirements of its single-family issuers is a prudent step in establishing a level playing field between depositories and nonbank financial institutions.”



Simon Boughey

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