Why Ginnie Mae's capital rules have remained a sticking point for some
October 3, 2022 10:50 AM
When two major housing agencies released their latest update to broad mortgage counterparty standards recently, the initial industry takeaway was that the new rules were generally favorable when compared to an earlier proposal.
Then people started looking more closely at Ginnie Mae's risk-based capital requirements.
Ginnie had reduced the minimum 10% RBC ratio it had proposed to 6%, consistent with the non-risk-based standard already in place.
However, it did not back off parts of itsearlier proposal that imposed a risk weighting for different assets, most notably retaining a bank-like 250% for mortgage servicing rights. Also, while it adjusted its overall ratio calculations in ways aimed at meeting nonbank needs, not everyone was happy with the formula.
It's at this point that some views on the standard diverge, withGinnie Mae and some analysts saying the rule's now at a point where most issuers can comply, and other researchers and former housing officials predicting could be more disruptive.
Meanwhile, individual issuer reactions have been mixed. Some, likeOcwen , have announced they will find it challenging to comply with the rules by the year-end 2023 deadline; while others, like PennyMac , are ready now. But most do seem to retain some concern that the capital standard could add to consolidation currently going on in the market.
To explore the reasons these rules have remained a sticking point for some and why it's been tough to reconcile some of the views around them, we consulted with people on both sides of the issue, including current Ginnie Mae officials.
Then people started looking more closely at Ginnie Mae's risk-based capital requirements.
Ginnie had reduced the minimum 10% RBC ratio it had proposed to 6%, consistent with the non-risk-based standard already in place.
However, it did not back off parts of its
It's at this point that some views on the standard diverge, with
Meanwhile, individual issuer reactions have been mixed. Some, like
To explore the reasons these rules have remained a sticking point for some and why it's been tough to reconcile some of the views around them, we consulted with people on both sides of the issue, including current Ginnie Mae officials.
Why some think the rules aren’t the right fit for nonbanks
At the heart of many critics' opinions has been a longstanding industry argument that risk-based capital standards traditionally used by depositories shouldn't be applied to institutions that aren't.
Banks hold a range of mortgages and other assets on their balance sheets over the long term. Nonbanks act more as "middlemen" who hold a more limited set of mortgage-related assets until they can be sold, and temporarily advance funds to bondholders on Ginnie's behalf when mortgage borrowers don't pay.
"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," David Stevens, CEO of mortgage advisory firm Mountain Lakes Consulting, and a former housing and trade group official.
Some experts think adjusted risk-based capital might be adaptable to nonbanks in some form. However, for companies that don't have a broad variety of assets like banks do, a risk weighting for 250% may seem daunting.
"The 250% in the current capital rules is extremely harsh on MSRs. The question is could they have done something that acknowledges the volatility but been a little bit gentler?" Laurie Goodman, a fellow at the Urban Institute's Housing Finance Policy Center, said.
One of her co-authors of research on the capital rule, former Ginnie Mae President of Ted Tozer, thinks there might've been ways to make the rule more manageable for nonbanks even if they didn't want to change the MSR risk weighting, such as including allowances for non-depositories' use of longer-term debt or hedging,
"Those are a couple things, at least in my thoughts, that they really need to incorporate and if they did that I think would take care of a lot of the issues coming from the mortgage banking community," Tozer said.
But Ginnie's has specifically ruled out these options.
"While debt with longer maturities may be helpful in managing liquidity risk, debt is not 'loss absorbing' in the sense of guarding against insolvency," Ginnie said in a FAQ on its rule. It calls MSR values too "opaque" to offer credit for hedging them.
Issuers do have other options if the MSR weighting is a challenge. Ocwen's contemplating shifting more to subservicing due to the new rule. However, that could lead to counterparty concentration risk in Ginnie MSR holdings if too many issuers do it, according to Christopher Whalen, an analyst who's worked with that company.
The new rule is "going to come with a cost which will reduce the value of servicing rights and thus increase government mortgage rates to consumers," Stevens predicts. "It will likely create consolidation because some won't be able to comply with it."
Karan Kaul, a principal research associate at the institute, is more concerned about cost than consolidation or ability to comply.
"The issue, I think, is what it does to access to credit, and mortgage rates, because at the end of the day, all of this is going to get passed on to the borrower," he said.
Some issuers say they don't really have trouble complying, but they'd like to have a better idea of why the bond insurer finds the risk weighting in particular important, and how Ginnie envisions it affecting issuers where MSRs need to be marked down.
"Ninety-five percent of their companies are okay with the new capital requirements, but what happens if there's a change and markets move more rapidly and it impacts certain lenders negatively?" Steve Adamo, president of national retail production at Embrace Home Loans asked.
"I do think that Ginnie goes into this with all of the right intentions," he added. "And I would like to think that if this turned into a problem that they would work with the lending community."
Banks hold a range of mortgages and other assets on their balance sheets over the long term. Nonbanks act more as "middlemen" who hold a more limited set of mortgage-related assets until they can be sold, and temporarily advance funds to bondholders on Ginnie's behalf when mortgage borrowers don't pay.
"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," David Stevens, CEO of mortgage advisory firm Mountain Lakes Consulting, and a former housing and trade group official.
Some experts think adjusted risk-based capital might be adaptable to nonbanks in some form. However, for companies that don't have a broad variety of assets like banks do, a risk weighting for 250% may seem daunting.
"The 250% in the current capital rules is extremely harsh on MSRs. The question is could they have done something that acknowledges the volatility but been a little bit gentler?" Laurie Goodman, a fellow at the Urban Institute's Housing Finance Policy Center, said.
One of her co-authors of research on the capital rule, former Ginnie Mae President of Ted Tozer, thinks there might've been ways to make the rule more manageable for nonbanks even if they didn't want to change the MSR risk weighting, such as including allowances for non-depositories' use of longer-term debt or hedging,
"Those are a couple things, at least in my thoughts, that they really need to incorporate and if they did that I think would take care of a lot of the issues coming from the mortgage banking community," Tozer said.
But Ginnie's has specifically ruled out these options.
"While debt with longer maturities may be helpful in managing liquidity risk, debt is not 'loss absorbing' in the sense of guarding against insolvency," Ginnie said in a FAQ on its rule. It calls MSR values too "opaque" to offer credit for hedging them.
Issuers do have other options if the MSR weighting is a challenge. Ocwen's contemplating shifting more to subservicing due to the new rule. However, that could lead to counterparty concentration risk in Ginnie MSR holdings if too many issuers do it, according to Christopher Whalen, an analyst who's worked with that company.
The new rule is "going to come with a cost which will reduce the value of servicing rights and thus increase government mortgage rates to consumers," Stevens predicts. "It will likely create consolidation because some won't be able to comply with it."
Karan Kaul, a principal research associate at the institute, is more concerned about cost than consolidation or ability to comply.
"The issue, I think, is what it does to access to credit, and mortgage rates, because at the end of the day, all of this is going to get passed on to the borrower," he said.
Some issuers say they don't really have trouble complying, but they'd like to have a better idea of why the bond insurer finds the risk weighting in particular important, and how Ginnie envisions it affecting issuers where MSRs need to be marked down.
"Ninety-five percent of their companies are okay with the new capital requirements, but what happens if there's a change and markets move more rapidly and it impacts certain lenders negatively?" Steve Adamo, president of national retail production at Embrace Home Loans asked.
"I do think that Ginnie goes into this with all of the right intentions," he added. "And I would like to think that if this turned into a problem that they would work with the lending community."
The rationale for the risk-based capital rules
The new capital requirements aim to strengthen and benefit nonbanks, said Sam Valverde, Ginnie's executive vice president and chief operating officer.
"These institutions require financing from lenders who are credit risk sensitive, so we are thinking about what a lender [that provides financing to a mortgage company] would want to see in a resilient institution across cycles and approximating that in our requirements," he said.
These types of lenders, which are often banks, do tend to adjust their financing in response to changes in the market value of mortgage assets; and servicing rights, in particular, can be volatile. Ginnie doesn't find other aspects of its counterparty standards sufficient to address this.
"We are attempting to ensure that balance sheets containing large concentrations of mortgage servicing rights 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," the government bond insurer said in its FAQ.
While the 250% risk weighting may seem daunting as it's at the high end of the capital rule's scale, it generally won't require mortgage companies currently in compliance with pre-existing net worth requirements to make changes unless they hold excess servicing as defined under the new rules.
"That 250% may sound scary, but MSRs under our risk based capital structure, are basically what they have to hold today with their net worth requirements. Where additional capital may be required is when an issuer comes across this deduction for the MSRs greater than net worth," said Gregory Keith, senior vice president and chief risk officer at Ginnie.
That deduction is necessary, because without it and with the required ratio at 6%, the type of borrowing the rules would allow would otherwise be too open-ended, according to the FAQ.
While Ginnie Mae has said no to a lot of suggestions, it is willing to tweak the requirements in some way if they turn out to weigh too heavily on the market.
"We are constantly engaging with our issuers to discuss these standards, and we have flexibility we can bring to bear on that set of issues if we see that there are potential market implications," Valverde said. "But as of now, we haven't seen any and we'll continue to work with issuers to understand any that may exist over the course of the next several quarters."
"We want our independent mortgage bankers to be successful," added Felecia Rotellini, a senior advisor at Ginnie Mae who works with nonbanks and other stakeholders. "We recognize their role in expanding access to credit, reaching into underserved communities and helping us build our mortgage-backed security platform. We want them to be able to continue to get their funding because that's the way we know they can continue to make government-backed loans for those who need it most."
"These institutions require financing from lenders who are credit risk sensitive, so we are thinking about what a lender [that provides financing to a mortgage company] would want to see in a resilient institution across cycles and approximating that in our requirements," he said.
These types of lenders, which are often banks, do tend to adjust their financing in response to changes in the market value of mortgage assets; and servicing rights, in particular, can be volatile. Ginnie doesn't find other aspects of its counterparty standards sufficient to address this.
"We are attempting to ensure that balance sheets containing large concentrations of mortgage servicing rights 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," the government bond insurer said in its FAQ.
While the 250% risk weighting may seem daunting as it's at the high end of the capital rule's scale, it generally won't require mortgage companies currently in compliance with pre-existing net worth requirements to make changes unless they hold excess servicing as defined under the new rules.
"That 250% may sound scary, but MSRs under our risk based capital structure, are basically what they have to hold today with their net worth requirements. Where additional capital may be required is when an issuer comes across this deduction for the MSRs greater than net worth," said Gregory Keith, senior vice president and chief risk officer at Ginnie.
That deduction is necessary, because without it and with the required ratio at 6%, the type of borrowing the rules would allow would otherwise be too open-ended, according to the FAQ.
While Ginnie Mae has said no to a lot of suggestions, it is willing to tweak the requirements in some way if they turn out to weigh too heavily on the market.
"We are constantly engaging with our issuers to discuss these standards, and we have flexibility we can bring to bear on that set of issues if we see that there are potential market implications," Valverde said. "But as of now, we haven't seen any and we'll continue to work with issuers to understand any that may exist over the course of the next several quarters."
"We want our independent mortgage bankers to be successful," added Felecia Rotellini, a senior advisor at Ginnie Mae who works with nonbanks and other stakeholders. "We recognize their role in expanding access to credit, reaching into underserved communities and helping us build our mortgage-backed security platform. We want them to be able to continue to get their funding because that's the way we know they can continue to make government-backed loans for those who need it most."
