The Federal Housing Finance Agency plans to raise standards for nonbank conforming loan servicers, particularly those who perform the function for Ginnie Mae, in a move likely spurred by regulatory developments.
The possible minimum liquidity requirement would be based on 4 basis points of government-sponsored enterprise servicing, rather than the current 3.5 bps; nonbanks that service Ginnie Mae deals would have to add another 10 bps.
In addition, the minimum net worth requirement would be raised to $2.5 million plus 35 basis points for Ginnie servicing only. Currently, the net worth minimum is $2.5 million plus 25 basis points for all single-family loans. However, this proposal appears to do more to redouble oversight of Ginnie servicers than raise the bar for them. The standards were drawn up in consultation with Ginnie, and are somewhat similar to the government agency's own evolving counterparty criteria.
More of a concern may be the part of the proposal that disallows the inclusion of unused portions of lines of credit from servicing advance facilities as assets servicers could use to meet liquidity standards. Nonbanks may bristle at this, because they have long sought standards that emphasize the ability to count the unused portions of credit lines as part of their liquidity over traditional bank requirements to hold balance sheet cash. Holding balance sheet cash means incurring additional expense for borrowing funds nonbanks don't need to run their operations.
Scott Olson, director of the Community Home Lenders Association, said his initial reaction to the policy "is one of concern," but the group wants more time to study the proposal before commenting in more detail on it.
The revised standards are in line with several regulatory developments, including increased attention to nonbank mortgage risks and
"We just got this and we're evaluating it, but it looks like this is an updating of a prudential standard that is consistent with current conditions," said Ed DeMarco, president of the bipartisan Housing Policy Council and a former acting director of the FHFA. "Director [Mark] Calabria has been emphasizing since he got to FHFA that he wants to end the GSEs' conservatorship but he doesn't want to do it until appropriate financial safety and soundness measures are put in place."
Calabria also sits on the board of the Financial Stability Oversight Council, which recently recommended improved regulation of
Higher net worth and liquidity requirements are consistent with the more capital-intensive work Ginnie servicers do. For example, while Fannie and Freddie relieve their servicers of financial responsibility for distressed loans after a few months by buying them out of securitized pools, Ginnie Mae servicers retain responsibility for loans through the loss mitigation process and file claims with FHA for reimbursement. Some of the loans Ginnie securitizes also tend to have a weaker credit profile than those underlying Fannie and Freddie's securities. In addition, economists have been concerned that the market's long expansion suggests it's overdue for a downturn.
The FHFA's move likely reflects these market trends as well as regulatory pressures. A proposed lowering of the threshold for a nonperforming loan charge and an upsizing of that charge, for example, appears to address the possibility that the economy could weaken.
"Everybody had expected this. It's been long overdue and it turned out to be pretty modest," said Steve Harris, managing director at MIAC Capital Markets Group. "Some of the loans in Ginnie Mae pool collateral have low FICOs, and some of the independent mortgage bankers' warehouse [or servicing advance] facilities have ugly [debt service coverage ratios]. You just need one VA no-bid [or other liquidity event] and that could wipe out a lot of capital for these institutions. The FHFA is just trying to protect the GSEs from that."
While the number of players in the Ginnie Mae market and liquidity has been limited at times — only 12 institutions purchased Ginnie MSRs last year — the new standards are unlikely to strain keystone players, he said. However, it's possible that some players with small portfolios could be forced to sell.
"This change will not be material for larger servicers but could impact smaller servicers and result in mortgage servicing moving to larger servicers over time," Bose George, managing director at Keefe, Bruyette & Woods, said in a report.
