Ginnie Mae on Thursday followed through on a plan to offer capital relief to nonbank securitization issuers who can demonstrate they're managing their interest rate risk on mortgage servicing rights.
The
The Department of Housing and Urban Development affiliate is aiming to address some lingering concerns about the contentious risk-based nonbank capital rule. While the recent election raises questions about its future, the rule is currently set to take effect at yearend.
Ginnie will be using a formula based on information in the
The relief related to interest-rate risk management would be applied to a requirement for a 6% risk-based capital ratio. That ratio, reflecting risk weighted assets to adjusted net worth, includes a particularly high risk weighting for MSRs of 250%, subject to certain calculations.
"By hedging MSRs, issues can reduce their interest rate exposure, and thus reduce fluctuation in MSR values," Ginnie said in
The formula Ginnie will use to determine effective interest rate management will compare the proportion of derivative gains and/or losses used to hedge MSRs relative to a change in their values based on market or model shifts as defined in the reporting form.
Average adjustments over a year's worth of quarters will be used to calculate a percentage reduction in MSR values used in determining the capital ratio, with no change to the issuer's adjusted net worth.
Nonbank issuers will have to submit information showing their MSR value adjustment and its impact on their risk-based capital ratio to obtain the relief.
Issuers who have not hedged consistently for 12 quarters can still qualify for relief using the available average if they've managed interest rate risk in this fashion in at least four of the most recent quarters. The issuer must also have hedged MSRs in one of the last four quarters.
MSR values will be adjusted downward in increments of 10%, 20% and so on, depending on hedging efficacy. Those with a hedging efficacy of 1%-19% will receive -10% adjustment, ascending in similar buckets up to 79%.
The maximum adjustment will be -50% for 80%-120% hedging efficacy. Adjustments descend similar to the manner they ascended. There will be a -40% adjustment for 121%-140% hedging efficacy and so on up to 180%. No credit is available for efficacy ratios above 199%.
There have been
The rule was originally set to go into effect at the end of last year, but concern about the ability to comply with it led Ginnie Mae to