Unintended consequences – DSNews
In early July 2021, Ginnie Mae issued a Request for Contribution (RFI) regarding the proposed tightening of the financial stability requirements for obtaining and maintaining eligibility and approval of Ginnie Mae’s single-family issuers. Responses were originally due to be sent no later than August 9. However, after receiving early market commentary on the potentially significant impact on Ginnie Mae’s current mortgage-backed securities issuers and services, this deadline has been extended to October 8.
For the background: Ginnie Mae is revising its practices and requirements as a direct result of the global financial crisis caused by the pandemic and the impact of prolonged forbearance on the market in general, and the liquidity risk of issuers and services specifically. Most would agree that Ginnie Mae applies prudent practices given changing risk dynamics such as the size of guaranteed portfolios, changing issuer and service profiles, and the increased vulnerability of the market to economic and stressful pressures. liquidity shocks. We applaud the fact that Ginnie Mae is moving forward cautiously and seeking market input to avoid a capital requirement that many issuers and services would struggle to meet.
While the proposed requirements may shock some, they shouldn’t come as a surprise. Section 111 of Dodd-Frank provided for the establishment of the Financial Stability Supervisory Board (FSOC), whose purpose is to identify risks to the US financial system caused by the failure of non-bank financial companies. Non-bank mortgage agents have been identified by the FSOC as particularly vulnerable.
To provide an effective safety net, Ginnie Mae offers new risk balancing parameters focused specifically on:
- Net value
- Risk-based capital ratios
If adopted, these requirements would be implemented immediately and applied to the 2021 financial statements, with possible extensions for those who cannot comply with the new rules in such a short time frame.
As might be expected, the proposed venture capital ratios (RBCs) are viewed as blatant by almost all issuers. The new requirements include the application of a 250% risk weighting scale to existing MSRs. While the formula itself is too complicated to discuss here, it is similar to that applied to federally and state chartered and FDIC insured banks. Over the past 10 years, there has been a significant exit from the savings market impacted by this calculation, not so much because of the calculation itself, but because of the problems they encounter when managing these portfolios. . As a result, and no doubt unforeseen, there was a significant loss of participation in the MSR market due to the withdrawal of small and medium-sized banks.
Meanwhile, a significant number of small and medium-sized non-bank issuers have entered the market to help fill the void. They have continued to increase their origination volumes and to keep their services in this space.
Ginnie Mae’s RFI offers a risk-based capital ratio of 10%, which is defined as the issuer’s “Adjusted Net Worth (ANW) for Excess MSR” of the issuer. It may be impossible for small and mid-sized non-bank issuers to meet the new requirements because they simply do not have the types of assets on their books to compensate for the new risk-based capital ratio. . Their only assets are cash and SRM.
There is a real possibility that Ginnie Mae’s proposal, in her well-intentioned effort to bring stability and liquidity to the market, could have the unintended consequences of reducing liquidity, concentrating market risk in a reduced number of areas. issuers and service providers and ultimately impact both originators and consumers.
In addition, the 250% risk weight would be applied to the current MSRs. What would be the impact on the market once interest rates start to rise? Think about it.