Why Ginnie Mae’s capital rules have remained a sticking point for some
Banks hold a range of mortgages and other assets on their long-term balance sheets. Non-banks act more like “intermediaries” who hold a more limited set of mortgage-related assets until they can be sold, and temporarily advance funds to bondholders on Ginnie’s behalf when mortgage borrowers do not pay.
“To apply a standard bank-wide capital risk used by entities that hold multiple asset classes to non-risk-taking entities that are single-class or monoline in structure is simply nonsense. “said David Stevens, CEO of mortgage advisory firm Mountain Lakes Consulting, and a former head of the housing and commerce group.
Some experts believe that risk-adjusted capital could be adaptable to non-banks in one form or another. However, for companies that don’t have a wide variety of assets like banks, a 250% risk weight can seem daunting.
“The 250% in the current capital rules are extremely harsh on MSRs. The question is, could they have done something that recognizes volatility while being a bit softer?” Laurie Goodman, a fellow at the Urban Institute’s Housing Finance Policy Center, said.
One of his co-authors of capital rule research, former Ginnie Mae chairman Ted Tozer, thinks there could have been ways to make the rule more manageable for non-banks, even if they did not want to alter the MSR risk weighting, such as including provisions for non-custodians’ use of longer-term debt or hedging,
“Those are a few things, at least in my opinion, that they really need to incorporate and if they did, I think it would solve a lot of the issues coming from the mortgage banking community,” Tozer said.
But Ginnie’s specifically excluded those options.
“While debt with longer maturities can be useful for managing liquidity risk, debt does not absorb losses in the sense of protecting against insolvency,” Ginnie said in a FAQ about his rule. He calls MSR values too “opaque” to offer credit to cover them.
Issuers have other options if MSR weighting is a challenge. Ocwen plans to spend more on maintenance due to the new rule. However, it could lead to counterparty concentration risk in Ginnie MSR’s holdings if too many issuers do so, according to Christopher Whalen, an analyst who has worked with the firm.
The new rule “is going to come with a cost that will reduce the value of servicing rights and thus increase government mortgage rates for consumers,” Stevens predicts. “It will likely create consolidation as some will not be able to comply.”
Karan Kaul, senior research associate at the institute, is more concerned with cost than consolidation or the ability to comply.
“The issue, I think, is what it does for access to credit and mortgage rates, because ultimately it’s all going to trickle down to the borrower,” he said.
Some issuers say they don’t really have trouble complying, but they’d like to get a better idea of why the bond insurer finds the risk weighting particularly important, and how Ginnie sees it affecting the transmitters where MSRs need to be reduced.
“Ninety-five percent of their businesses are okay with the new capital requirements, but what if there is a change and markets move faster and that has a negative impact on some lenders? asked Steve Adamo, president of national retail production at Embrace Home Loans.
“I think Ginnie is going into it with all the right intentions,” he added. “And I would like to think that if that became an issue, they would work with the lending community.”