‘Quality of capital’ would challenge non-depositories under bank rules

By some current measures, nonbank capitalization looks strong compared to banks, but the way a Ginnie Mae proposal aims to assess the value of mortgage servicing rights would change that, Moody’s Investors Service reported Tuesday.

Based on ratios of tangible common equity to tangible managed assets, and TCE to estimated risk-weighted assets, the capitalization of rated nonbanks looks favorable, according to the Moody’s report.

As of Dec. 31, 2020, the average TCE to TMA ratio for nonbanks was 15.3% compared to 7.1% for a sample of large regional banks. Moody’s analysts have found this measure to be highly correlated with whether or not an issuer defaults on its obligations.

A comparison of TCE to RWA ratios, which Moody’s uses to assess capital adequacy and leverage for companies with varying asset risks, was more favorable to nonbanks, with a 20.9% share for them and 9.1% for large regional banks.

However, bank-like capital requirements in Ginnie Mae’s recent proposal would put nonbanks in a weaker position.

“If MSR amounts that exceed 25% of TCE are deducted from the non-banks' capital, similar to what is done for bank risk-based regulatory capital ratios, the capitalization of many companies declines quite materially,” Moody’s noted in its report.

On average, adjusted TCE to RWA for the nonbanks would drop to 9.7% from 20.9%. That makes the non-banks' adjusted 9.7% weaker than the 9.9% average for depositories, and that adjusted number “differs materially by company.”

Some industry trade associations have suggested that the proposal from the agency, which ensures payments from securitizations of government-guaranteed mortgages get passed on to bond investors, would negatively impact the low- to moderate-income housing markets nonbank mortgage companies support.

Ginnie Mae recently gave the housing finance industry more time to respond to its capital plan, in the wake of concerns related to its impact on nonbanks, particularly smaller players.

Ginnie, which is an arm of the Department of Housing and Urban Development, also plans to use the additional time to also coordinate with other government agencies such as the Conference of State Bank Supervisors, which also oversee or work with nonbanks.

Ginnie’s capital plan appears to be in line with a pre-pandemic proposal by the FHFA aimed at improving oversight of counterparty standards for nondepositories. The FHFA reconsidered that plan in light of the pandemic and the concerns of smaller firms.