Mortgage

Ginnie Mae says most issuers are compliant with risk-based capital rule

Ginnie Mae on Tuesday issued a statement indicating most nonbank mortgage companies it works with are ready for its upcoming risk-based capital rule implementation, while also recognizing that not everyone is.

“While the overwhelming majority of Ginnie Mae issuers are compliant with these requirements today, we will continue engaging with our issuers throughout the implementation period,” President Alanna McCargo said in a statement that accompanied the release of answers to frequently asked questions about the new requirements. In the FAQ, the government bond insurer addressed some aspects of the rule that have given companies like Ocwen and some trade groups pause.

Notably, the FAQ addresses the 250% risk weighting for mortgage servicing rights that some have questioned. It also acknowledged Ginnie’s shift to capital standards more typically associated with banks in addition to the liquidity measures that it’s historically put more emphasis on for non-depositories.

“MSRs are difficult to value because of the opaqueness of the MSR market. MSR values are also highly volatile. MSRs are often financed with terms that could result in margin calls,” the FAQ read. “In a rapidly declining market, precisely when funding needs are at their highest, these terms could lead to margin spirals and significant MSR write downs. Because of the inherent importance of leverage in non-bank balance sheets, this constitutes a direct threat to liquidity and stability.”

Ginnie’s formula for nondepository capital requirements is designed to be a better fit for non-depositories than typical bank rules, it noted.

“The risk-based capital ratio that Ginnie Mae adopted, while similar to Basel treatment of MSRs in some respects, is significantly more lenient,” said the government bond insurer, which is an arm of the Department of Housing and Urban Development. “Basel deducts MSRs exceeding 25% Common Equity Tier 1, while RBCR does not deduct MSRs from adjusted net worth…unless MSRs exceed 100% of (ANW).”

The FAQ also addressed concerns about the deduction of MSRs in the adjusted net worth formula Ginnie uses to determine its ratio, which it indicated were related to its concern about MSR financing.

“With only a 6% capital requirement and a 250% risk weight, independent mortgage banks could theoretically borrow 85 cents on the dollar ((100% – (250% x 6%)) = 85%) against MSRs without limit. Through the addition of a risk-based capital requirement, Ginnie Mae seeks to limit that exposure to ensure long-term viability for all of our issuers,” the government bond insurer said.

In addition to explaining the reasons for the MSR risk weighting, the guide also answers questions regarding hedging and the sale of excess servicing spread, among other things.

The risk-based capital rule is part of a broader set of new counterparty standards released recently for mortgage companies. Ginnie coordinated some of its rules with the Federal Housing Finance Agency, but the risk-based capital rule is somewhat unique.

Ginnie’s role is to ensure that payments from mortgages that other government agencies like the Federal Housing Administration and Department of Veterans Affairs back get passed on to mortgage-backed securities investors — something it relies on issuers to do. The FHFA oversees a separate part of the mortgage market but shares some counterparties with Ginnie.

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