The new Ginnie Mae issuer financial requirements, first published on August 17, 2022 in APM 22-09 by joint announcement with the Federal Housing Finance Agency[1], are scheduled to take effect in two parts beginning September 30, 2023*. See All Participant Memorandum (APM) (ginniemae.gov) and All Participant Memorandum (APM) (ginniemae.gov). Critics of the new financial requirements say they are badly flawed and ill-advised.
1. Revised Net Worth Requirements
Effective September 30, 2023, the minimum Net Worth requirement for all institutions seeking approval as Ginnie Mae single-family Issuers (“SF Applicants”) will be $2.5mm “plus 0.25% (25 basis points) of the applicant’s total Government-Sponsored Enterprise (“GSE” or “Enterprise”) single-family outstanding servicing portfolio, plus 0.25% (25 basis points) of the applicant’s total non-agency single-family servicing portfolio”.
2. Revised Liquidity Requirements
I. Eligible Assets
Effective September 30, 2023, for SF Applicants and SF Issuers, the list of liquid assets that are eligible to meet Ginnie Mae’s liquidity requirement will be expanded to include GSE obligations (marked to market), GSE MBS (marked to market), and the following advances made as reflected in total assets reported on the balance sheet: advances made to cover principal and interest payments, taxes and insurance payments, and foreclosure advances relating to loans serviced on behalf of mortgagors and mortgage investors.
II. Required Liquidity
Effective September 30, 2023, SF Applicants[3] will be required to have and maintain liquid assets equal to the greater of:
“$1,000,000, or the sum of:
(i) 0.035% (3.5 basis points) of the applicant’s outstanding GSE single-family servicing Unpaid Principal Balance (“UPB”), if the applicants remits (or the Enterprise draws) the principal and interest only as actually collected from the borrower, plus
(ii) 0.07% (7 basis points) of the applicant’s outstanding GSE single-family servicing UPB, if the applicant remits (or the Enterprise draws) the principal or interest, or both, as scheduled, regardless of whether principal or interest has been collected from the borrower, plus
(iii) 0.035% (3.5 basis points) of the applicant’s outstanding non-agency single-family UPB.”
Effective December 31, 2023, SF Applicants that originated more than one billion in UPB of residential mortgages in the most recent four-quarter period must have assets equal to the greater of $1,000,000 or the sum of (i)-(iii) listed immediately above, and
(iv) 0.10% (10 basis points) of the Issuer’s outstanding Ginnie Mae single-family servicing UPB, plus
(v) 0.5% (50 basis points) of the sum of the applicant’s total Loans Held For Sale (“HFS”), plus
(vi) 0.5% (50 basis points) of the applicant’s UPB of Interest Rate Lock Commitments (“IRLCs”) after fallout adjustments. UPB of IRLCs after fallout adjustments is UPB of IRLCs after making adjustments for estimated fallout (i.e., excluding part of the balance because some locks are not expected to close).
3. Risk Based Capital Ratio
Scheduled to take effect December 31, 2024, SF Issuers and SF Applicants that are not financial institutions must maintain a Risk-Based Capital Ratio (“RBCR”) of a minimum of 6%.[4] The Risk Based Capital Ratio is the most controversial part of the new financial requirements not only because it imposes a new financial requirement on a cohort that currently has no RBCR (unlike banks that are regulated and take customer deposits) but also because it isn’t seen as being properly calibrated to address the risks.
RBCR equals Adjusted Net Worth (as currently defined in the Ginnie Mae MBS, effectively, Equity) minus Excess Mortgage Servicing Rights (“MSRs”) divided by total Risk Weighted Assets. Total Risk Weighted Assets equals the sum of total assets calculated on a risk weighted basis according to the following schedule:
Risk Weighting Asset Type
0% Cash and Cash Equivalents
0% Reverse Mortgages Held for Investment (non-true sale)
0% Ginnie Mae Loans Eligible for Repurchase, if included in total assets
20% Government Loans HFS
50% Conforming and Other Loans HFS
250% Total MSRs (not to exceed Adjusted Net Worth)
100% All other assets not included above
While it is perfectly logical for Ginnie Mae to seek to ensure that non-bank SF Issuers have the financial strength to withstand adverse market conditions, there is strong opposition to the manner in which they have chosen to address it. Although Ginnie Mae takes the position that the new requirements were designed taking into account the “unique attributes of independent mortgage banks”, it appears that Ginnie Mae missed the mark …by a lot. For example, it is a well-known in the industry that the balance sheets of many independent mortgage banks include MSRs and government loans on the asset side, each of which receives punitive treatment under the new requirements, particularly the MSRs.
Ginnie Mae’s rationale in devising a Risk Based Capital requirement that takes aim at its own MSR asset is being questioned. So is the fact that, by all accounts, such treatment is more likely than not going to have a detrimental effect on the MSR market. A number of well-regarded market observers disagree with Ginnie Mae’s claims that if the new capital requirements were in effect today, “95% of our issuers (by count) would be compliant”. Many market observers have serious concerns as to the effect the RBCR will have on independent mortgage banks and the segments of the mortgage market they serve which tend to be the first-time homebuyers, low- and moderate-income borrowers, rural home borrowers, tribal home borrowers and veteran home borrowers across the country. Assuming such issuers find themselves unable to make the business adjustments necessary to comply with the RBCR, they will have no choice but to sell MSRs. Assuming the prognosticators are correct and a number of MSR sellers suddenly find themselves in the market looking for buyers, the price of such MSRs is sure to erode.
Given the exodus of Banks from the Ginnie Mae issuer market over the last several years due in part to the reduced regulatory cap on MSRs stemming from Basel III, it is hard to imagine why the powers that be at Ginnie Mae would think similar requirements would work for non-bank issuers. One industry commentator points to the failure of U.S. regulators to recognize the true value of the servicing asset:
“The mortgage servicing asset, lest we forget, is not only a source of steady cash flow for issuers, but contains embedded optionality in terms of refinance opportunities that is arguably worth more than the fair value of the asset under GAAP. Prudential regulators don't even recognize this extremely valuable optionality, one reason bank lending performance in 1-4s is so poor.”[5]
Notwithstanding the pushback Ginnie Mae has received on the RBCR from the MSR market, Ginnie Mae seems determined to have it take effect. Although Ginnie Mae did further delay implementation of the RBCR another year until the end of 2024, to date it hasn’t changed the policy. Only time will tell if Ginnie Mae can be convinced to turn away from the RBCR approach and develop a policy that deals with the real risks it perceives to be associated with its MSRs while at the same time leaving the mortgage industry intact.
FOOTNOTES
[1] Notably, the FHFA requirements do not include the Risk-Based Capital Requirements discussed below.
[2] The Net Worth requirements for Ginnie Mae single-family Issuers (“SF Issuers”) are identical to those for SF Applicants except that the percentage of the SF Issuers total GSE single-family outstanding servicing portfolio increases to 0.35% (35 basis points).
[3] SF Issuers have similar requirements but also include (vi) 0.10% (10 basis points) of the Issuer’s outstanding Ginnie Mae single-family servicing UPB.
[4] In addition to a Leverage Ratio of at least 6%.
[5] See Christopher Whalen “Ginnie Mae Issuer Rule Threatens Government Market”, 7/20/2021 Hedgeye (https://app.hedgeye.com/insights/102527-ginnie-mae-issuer-rule-threatens-government-market?with_category=17-insights).