“High quality of capital” would query non-custodians beneath banking laws

After some recent action, the capitalization of non-banks versus banks looks strong, but the way a proposal by Ginnie Mae aims to assess the value of mortgage service rights would change that, Moody's Investors Service reported Tuesday.

Based on the ratios of tangible common equity to tangible assets under management and TCE to estimated risk-weighted assets, the capitalization of non-banks rated according to Moody's report looks favorable.

As of December 31, 2020, the average TCE to TMA ratio for non-banks was 15.3% compared to 7.1% for a sample of large regional banks. The analysts at Moody's have found that this key figure correlates strongly with whether an issuer does not meet its obligations or not.

A comparison of the TCE RWA ratios, which Moody’s uses to assess the capital adequacy and indebtedness of companies with different asset risks, turned out to be more favorable for non-banks with a share of 20.9% for them and 9.1% for large regional banks.

However, bank-like capital requirements in Ginnie Mae's latest proposal would put non-banks in a weaker position.

"If MSR amounts that exceed 25% of the TCE are deducted from the equity of the non-banks, similar to the risk-based regulatory capital ratios of the banks, the capitalization of many companies drops significantly," Moody’s stated in his report.

On average, the adjusted TCE of RWA for the non-banks would decrease from 20.9% to 9.7%. That makes the adjusted 9.7% for non-banks weaker than the 9.9% average for custodians, and that adjusted figure varies “significantly between companies”.

Some industry associations have suggested that the agency's proposal to ensure that payments from securitization of government-guaranteed mortgages are passed on to bond investors would have a negative impact on the low-to-middle-income real estate markets that support non-bank mortgage companies.

Ginnie Mae recently gave the home finance industry more time to respond to its capital plan after concerns about the impact on non-banks, especially smaller players.

Ginnie, a branch of the Department of Housing and Urban Development, also plans to use the extra time to coordinate with other government agencies, such as the Conference of State Bank Supervisors, who also oversee or work with non-banks.

Ginnie's capital plan appears to be in line with a pre-pandemic FHFA proposal aimed at improving oversight of counterparty standards for non-custodians. The FHFA has reconsidered this plan in light of the pandemic and concerns from smaller businesses.

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