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Unintended Consequences

In early July 2021, Ginnie Mae issued a Request for Input (RFI) pertaining to proposed tightening of financial stability requirements for obtaining and maintaining Ginnie Mae single-family issuer eligibility and approval. Responses were initially due by August 9. However, after receiving initial feedback from the market on the potentially significant impact to current Ginnie Mae mortgage-backed securities issuers and servicers, this deadline has been extended to October 8.

For background: Ginnie Mae is reviewing its practices and requirements as a direct result of the global financial crisis caused by the pandemic and the impact of protracted forbearance on the market in general, and issuer and servicer liquidity risk in particular. Most will agree, Ginnie Mae is applying prudent practices given the changing risk dynamics such as size of guaranteed portfolios, changing profiles of issuers and servicers, and the increased market vulnerability to economic stress and liquidity shocks. We applaud the fact that Ginnie Mae is treading carefully and looking for input from the market to avoid a capital requirement that many issuers and servicers would struggle to fulfill.

While the proposed requirements may come as a shock to some, they should not be a surprise. Section 111 of Dodd-Frank provided for the establishment of the Financial Stability Oversight Council (FSOC), whose purpose is to identify risks to the U.S. financial system caused by failure within nonbank financial companies. Nonbank mortgage servicers have been singled out by the FSOC as particularly vulnerable.

To provide an effective backstop, Ginnie Mae is proposing new risk-balancing parameters focused specifically on:

  • Net worth
  • Liquidity
  • Risk-based capital ratios

If enacted, these requirements would be implemented immediately and applied to 2021 fiscal year financial statements—with possible extensions for those who cannot meet the new regs in such short order.

As one might expect, the proposed risk-based capital (RBC) ratios are considered egregious by almost all issuers. The new requirements include applying a risk weighting scale of 250% to existing MSRs. Although the formula itself is too complicated to get into here, it is similar to that applied to federally- and state-chartered and FDIC-insured banks. Over the last 10 years, there has been a significant exit from the market by thrifts impacted by this calculation—not so much because of the calculation itself but because of the issues they encounter when servicing these portfolios. As a result, and no doubt unanticipated, there has been a significant loss in MSR market participation as a result of small- to mid-sized banks opting out.

Meanwhile, there are a significant number of small- to medium-sized nonbank issuers that have come into the market to help fill the void. They have been steadily growing their origination volumes and retaining servicing in this space.

The Ginnie Mae RFI proposes a Risk-Based Capital Ratio of 10%—which is defined as the issuer’s “Adjusted Net Worth (ANW) modified for excess MSRs.” It may be impossible for the small- to medium-sized nonbank issuers to meet the new requirements because they simply don’t carry the types of assets on their books necessary to offset the new Risk-Based Capital Ratio. Their only assets are cash and MSRs.

There is a real possibility that the Ginnie Mae proposal, in its well-intended effort to bring stability and liquidity to the market, may have the unintended consequences of reducing liquidity, concentrating market risk into fewer issuers and servicers, and ultimately impacting both originators and consumers.

Additionally, the 250% risk weighting would be applied to today’s MSRs. What would the impact be on the market once interest rates begin to rise? Think about it.

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About Author: Tom Piercy

Tom Piercy is President of National Enterprise Business Development and Managing Director at Incenter Mortgage Advisors, the MSR component of Incenter’s integrated mortgage services platform. He has dedicated his entire professional career to the secondary mortgage markets with a specialty focus in providing market-to-market valuations and trading of mortgage-servicing rights and whole loans. More than 30 years of active trading have earned Piercy first-call status from literally hundreds of industry buyers and sellers seeking secondary market MSR expertise in support of their risk and liquidity strategies. Prior to joining Incenter, Piercy was President of Interactive Mortgage Advisors. He earned his B.S. in finance and accounting from DePaul University.
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