The controversy around Ginnie Mae's new capital requirements explained

December 5, 2022 8:20 AM

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Ginnie Mae's updated capital requirements affect both banks and nonbanks, and many believe that the new requirements are not manageable, while others say they're prepared for the new rules, which now go into effect at the end of 2024.

Ginnie reduced the minimum 10% the risk-based capital ratio it had proposed to 6%, consistent with the non-risk-based standard already in place.

However, it did not change aspects of its earlier proposal that imposed a risk weighting for a variety of assets, most notably retaining 250% for mortgage servicing rights similar to the ratio imposed on banks. Also, while it adjusted its overall ratio calculations in ways aimed at meeting nonbank needs, not everyone was happy with the formula.

Read more about the new regulations as well as reactions within the industry in our roundup.

The seal of the Federal Housing Finance Agency (FHFA) is displayed outside the organization's headquarters in Washington, D.C., U.S., on Wednesday, March 20, 2019.

Andrew Harrer/Bloomberg

Ginnie's financial eligibility rules aligned with the FHFA's

The financial-eligibility requirements for counterparties announced by the Federal Housing Finance Agency and Ginnie Mae were initially greeted warmly by the mortgage industry due to their coordination with other agencies.

"It's certainly appropriate to have reasonable and rigorous capital and liquidity standards, it's better to have them aligned than this be misaligned, and it's better to have ample time to adjust to these meaningful changes," said Ed DeMarco, president of the Housing Policy Council.

Read more:

FHFA, Ginnie Mae jointly revise requirements for mortgage companies

Bloomberg News

Small and large lenders divided on new capital requirements

Consensus on Ginnie Mae's capital requirements looks like a difficult prospect, given the two different perspectives on the initiative that are largely based on what size and type of firm you are.

Larger, publicly traded companies are likely to "have excess capital and will not be materially impacted by the new capital rules," according to analysts at Keefe, Bruyette & Woods.

In contrast, the Community Home Lenders Association believes that "imposing bank-like requirements on smaller issuers is unnecessary, inappropriate, and likely to reduce the number of issuers."

Read more:

Ginnie Mae's new capital rules draw split opinions

Questions remain about eligibility rules despite FAQs

Definitive answers to questions about Ginnie Mae's Amended Eligibility Requirements remain elusive following the release of a set of FAQs.

In a statement accompanying the FAQs, Ginnie Mae president Alanna McCargo said that the vast majority of nonbank mortgage firms are ready to implement the new capital rules. However, some believe the key issue of mortgage servicing rights (MSRs) is not adequately covered.

"The majority of government lenders sell their loans servicing released to larger banks or independent mortgage banks," says Christopher Whalen, Chairman of Whalen Global Advisors. "The large owners of Ginnie Mae MSRs are really the top 20-25 issuers."

Read more:

Ginnie Mae FAQs sidestep the key questions about new requirements

PennyMac says it can manage new eligibility rules

PennyMac's capital ratio for mortgage origination and servicing is "well over" the 6% threshold in Ginnie Mae's new capital requirements, according to Chief Financial Officer Dan Perotti.

This comfort level with the financial eligibility rules will allow PennyMac to focus on other key initiatives.

"We still have a significant amount of room to be able to continue to grow our MSR portfolio and not run into any issues in terms of the risk-based capital requirement," says Perotti.

Read more:

Ginnie Mae capital requirements look manageable for us: PennyMac

New requirements may be too onerous for Ocwen

The high risk weight of 250% assigned to mortgage servicing rights in the new Ginnie Mae capital requirements update may be a challenge to meet for Ocwen Financial.

The firm is confident it will be able to comply with other aspects of the new requirements announced by Ginnie Mae in coordination with the Federal Housing Finance Agency, but the risk-based capital ratio could be too much.

In September the company said it was "having discussions with Ginnie" about the situation and hoping to meet the risk-based capital requirement. Ocwen indicated it will also need to assess the costs involved versus the potential benefits before proceeding.

Read more:

Ocwen warns of difficulty meeting new Ginnie Mae capital requirement

Diverging opinions persist over new counterparty rules

Ginnie Mae's new risk-based financial eligibility regulations for counterparties continue to raise questions on the impact on nonbanks.

"Applying a bank-wide capital standard risk used by entities that hold multiple asset classes to non-risk taking entities that are single class or monoline in their structure, it's just nonsensical," says David Stevens, CEO of Mountain Lakes Consulting, from the nonbank perspective.

Sam Valverde, Ginnie's chief operating officer, thinks differently. "These institutions require financing from lenders who are credit risk sensitive, so we are thinking about what a lender would want to see in a resilient institution across cycles and approximating that in our requirements."

Read more:

Why Ginnie Mae's capital rules have remained a sticking point for some

Issuer liquidity is on the agenda for Ginnie Mae

Concerns over the financial health of its bank and nonbank issuers in the face of increased market risk, and the impact of a potential failure on its low to moderate income borrowers, is the driving force behind Ginnie's Mae desire to set up a permanent liquidity facility.

"The most important thing to us is that [issuers] have access to liquidity at all times through all economic cycles, because the people that would be hurt by them being hurt are very vulnerable populations," said President Alanna McCargo.

As many of Ginnie's borrowers come from Black and Hispanic communities with low homeownership rates, McCargo's plans, which also include updating its counterparty rules, seek to get ahead of future market turbulence and unexpected events like the pandemic.

Read more:

Ginnie Mae sets sights on a permanent liquidity facility