FHFA Proposes Minimum Financial Requirements for GSE Servicers, Sellers

The Federal Housing Finance Agency (FHFA) announced on Friday proposed new minimum financial requirements for mortgage sellers and servicers to do business with Fannie Mae and Freddie Mac.

The proposed requirements include minimums for net worth, capital ratio, and liquidity criteria that must be met by servicers and sellers to do business with the GSEs. FHFA said the purpose of the requirements is to ensure safe and sound operations of the GSEs and at the same time further the FHFA's goal of promoting efficient, competitive, liquid, and resilient national finance markets for housing. The proposed criteria will also provide stakeholders and industry participants with greater transparency, consistency, and clarity, as directed by the 2014 and 2015 Fannie Mae and Freddie Mac scorecards. FHFA and the GSEs will obtain feedback from regulators, industry participants, and other stakeholders, and improve their understanding.

According to the FHFA's announcement, all servicers will be expected to comply with the proposed minimum requirements in order to to business with either of the GSEs, 6 months after finalization.

• The proposed minimum requirements are as follows:
  For net worth (for all sellers and servicers) a base of $2.5 million plus 25 basis points of unpaid principal balance for all loans serviced;
• For capital ratio (for non-depository sellers and servicers, the proposed minimum requirement is a tangible net worth and/or total assets of less than or equal to 6 percent. Regulatory standard will still apply for depository institutions;
• For liquidity, the proposed minimum requirement for all non-depository sellers and servicers is 3.5 basis points of total agency serving, plus incremental 200 basis points of total nonperforming agency servicing that exceeds 6 percent of the agency's total servicing UPB. Institutions may include the following as assets for liquidity: Cash and cash equivalents, Available for Sale or Held for Trading Investment Grade Securities that include Agency mortgage-backed securities and obligations of the GSEs and Treasury; and the unused/unavailable portion of committed servicing advance lines. As with capital ratio, the regulatory standards for liquidity will still apply for non-depository institutions.

According to the FHFA's announcement, the agency anticipates that the proposed minimum requirements will be finalized sometime during the second quarter of 2015 and will go into effect approximately six months later. FHFA and the GSEs plan to reach out to help sellers and servicers better understand the requirements and prepare for when they go into effect.

Mark J. O'Brien, Chairman and CEO of Tampa, Florida-based servicer Walter Investment Management, responded favorably to the FHFA's new proposed requirements.

"We are pleased that the proposed minimum financial eligibility requirements have been issued, providing additional clarity to the enterprise's seller/servicers," O'Brien said. "We applaud the FHFA's thoughtful and deliberate approach to developing these requirements and look forward to their finalization later this year. We have reviewed the proposed standards for our seller/servicer entities which are the entities contractually obligated to the enterprises. Based on our review of the requirements and our preliminary discussions with our counterparties we expect that our seller/servicers would currently be in compliance with the new requirements as proposed if the proposed rules were in effect today, positioning us to operate and grow our businesses for the foreseeable future."

Zacks.com also applauded the new proposed financial requirements on its analyst blog.

"The FHFA's proposition will aid in averting another financial crisis and reducing risk of the housing market," Zacks.com wrote on the blog. "Moreover, the transparent system is expected to be appreciated by the stakeholders and other industry participants, which would help in the finalization of rules and bringing consistency in the overall system."

FHFA said the purpose of implementing the new requirements will be to "improve the safety and soundness of the enterprises by strengthening their minimum seller/servicer standards,"; "To create a more consistent framework for seller/servicer eligibility"; "To provide the industry with greater clarity about the enterprises' seller/servicer counterparty requirements"; and to "provide for consistent application of the new eligibility requirements by both enterprises, subject to enterprise discretion where appropriate."