Non-bank lenders object to Ginny Mae’s overhaul plan

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Ginny Mae’s proposal to introduce risk-based capital requirements for nonbanks has sparked protest from mortgage lenders, who issue the vast majority of loans to first-time homebuyers and minorities.

Ginny gave out request for input in early July on a plan that will set requirements for added net worth and liquidity for all issuers. It would also require non-bank lenders to have a 10% risk-based capital ratio, with a 250% risk ratio for mortgage rights, significantly higher than the calculation for other assets.

State and federal regulators have pushed for prudential regulation and stress testing for non-bank lenders for years, but Jeannie’s new plan is the first to include a risk-based capital standard.

Some experts have suggested that the changes, if effective, would force the sale of mortgage service rights and force some lenders to stop issuing loans guaranteed by the Federal Housing Administration and other government agencies.

“This is a huge deal, it is extremely over the top, and it will literally be a dagger in the back of the FHA program,” said former FHA Commissioner Dave Stevens, CEO of Mountain Lake Consulting and former president and CEO of Mortgage Bankers. Association.

The MBA called for more tests and transparency.

“Risk-based capital regulations are completely new and untested and could negatively impact other strong issuers,” said Pete Mills, MBA senior vice president of housing policy. “Jeannie needs to test this back in time to demonstrate impact before moving on.”

Jeannie identified three specific risks in the mortgage market that have prompted the need for increased liquidity and capital expenditures: increased guaranteed portfolios, a change in the credit profile, and higher systemic vulnerability to economic stress.

“Liquidity shocks demanded a stricter set of financial requirements than was the case during [Global Financial Crisis,]Ginny said in the request.

The proposal was announced by Gregory Keith, Ginny’s Senior Vice President and Chief Risk Officer, on July 9th. The request is open for public comment for 30 days or until August 9th. If approved, the plan will take effect in one year. the end.

“This announcement underscores Jeannie Mae’s commitment to continually assess the requirements of the MBS Guidelines to continue to ensure the success of the Issuer in our program while minimizing the risk to the government’s unconditional assurance,” Keith said in a press release.

Jeannie has never previously included risk-based capital requirements for members. The expanded NPV and liquidity requirements will apply to all Ginny issuers, but the risk-based capital requirement will only apply to non-banks as banks already face prudential regulatory requirements.

While some experts said additional fees and charges would be needed to cover a potential liquidity crunch, several mortgage experts said that Ginny should be provided with more data on how she calculated the risk weights.

According to the plan, certain low-risk assets, such as cash, will have zero risk weight. Government loans will have a weight of 20%, followed by 50% for related loans.

But the proposed 250% risk weight for the firm’s mortgage portfolio has received the most attention and criticism, amplifying the portfolio’s impact on the company’s equity benchmark.

“Ginny has to be mindful of the levels they set,” said Ted Tozer, former President Ginny May who served during the Obama administration. “It’s not so much whether the rules are inappropriate, but the level they set. If someone hedges their services, they should get a loan, because hedging reduces volatility. “

Others questioned Ginny’s methodology, noting that no data sources were specified in the request for input.

“How did they come up with a 250 percent risk weighting? Who did the analysis? ” Stevens said. “What is the logic behind this? What is behind the mathematics and where is the transparency? “

The emphasis on mortgage servicing in the plan could cause particular disdain from the industry given the dominant position of non-bank loan servicing institutions in Ginny’s pools. According to a June report released by Ginnie, 70% of the 30 largest servicing loans in these pools are non-banks.

Ginnie’s policy is not subject to the formation of rules with notice and comment. Lenders and trade groups said they were upset that Jeannie did not alert them to the policy change. It was released late Friday, a tactic often used by agencies seeking to cover up bad news.

Ginnie is a publicly owned commercial company that is part of the Department of Housing and Urban Development. Jeannie does not buy or sell loans, but rather guarantees the timely payment of principal and interest to investors in mortgage-backed securities that are federally insured or guaranteed by four agencies: FHA, Department of Veterans Affairs, USDA, Rural Development. program and Office of Government and Indian Housing.

Jeannie used to rely on prudential regulators like the FDIC and the Office of the Comptroller to conduct due diligence on banks, but there is no prudential regulator to oversee nonbanks.

The Federal Housing Finance Agency has offered increased financial requirements for seller-service companies Fannie Mae and Freddie Mac. in January 2020 but canceled the offer six months later, citing the Covid-19 pandemic.

The State Bank Supervisory Bodies Conference issued proposed standards in January for non-banks, which also did not include risk-based capital requirements.

While the FHFA has no authority over Jeannie, some experts suggest there needs to be coordination between the various overseers of the housing market.

“One of the biggest challenges here is coordination between Jeannie and the FHFA,” Mills said. “Parts of this structure are not too different from what the FHFA proposed last year to address concerns about allocating the same capital and liquidity to support the FHA as you are doing for [government-sponsored enterprises.]”

Over the past few years, non-bank mortgage companies have come to control more than 90% mortgage market of $ 12 trillion.

Nonbanks also tend to be undercapitalized, and experts speculate that imposing excessive ownership fees on mortgage servicing rights may cause some to abandon Jeannie. If that happens, it would mean fewer lenders will issue FHA and other agency loans to new home buyers and minority borrowers.

“Ginny Mae must carefully assess the potential impact of this risk-based capital requirement on the appetite of independent mortgage bankers to create, acquire and hold Ginny Mae mortgage servicing rights,” said Larry Platt, partner at Mayer Brown. “Non-bank service providers will need significant other assets to make their net worth — to offset the unfavorable risk weight assigned to mortgage rights — meet the required risk-based capital ratio.”

Jeannie’s offer also came as Biden administration officials take on new jobs at FHFA, FHA and the Department of Housing and Urban Development.

Ginny’s spokesperson did not confirm if HUD secretary Marcia Fudge was aware of the request for input. Artifice witnessed before Congress on the need to keep access to credit open to first-time and minority homebuyers. According to many experts, this proposal will undermine these efforts.

Last month Sandra Thompson was named acting FHFA director after Biden removed Trump-appointed FHFA director Mark Calabria. The FHA does not currently have a commissioner either. Although President Biden in June appointed Julia Gordon, president of the nonprofit National Community Stabilization Trust, will be the next FHA commissioner and has yet to be Senate approved.

Meanwhile, Jeannie Mae has been without a president for four and a half years with a vacant position in the Trump administration.

In addition to risk-based capital requirements, Jeannie has proposed additional NPV and liquidity requirements to accommodate other issuers’ liabilities, as many lenders also sell Fannie and Freddie loans.

Jeannie wants to add a commission equal to 25 basis points of the issuer’s outstanding obligations to Fannie and Freddie. Ginny’s issuers are currently required to hold $ 2.5 million in equity plus 35 basis points of their outstanding single-family obligations to Ginny.

Ginny also said that her current liquidity requirements do not address the interest rate risk of loans from a lender or liquidity requirements from sources other than Ginny. He proposed adding 5 basis points to the outstanding obligations of creditors to Fannie and Freddie and 20 basis points for loans held for sale.

“While Jeannie may be trying to protect herself from asset class volatility over business cycles and differences in issuer estimates, the implementation of a risk-based capital ratio system should be gradual, developed in coordination with the industry, and well calibrated. “so as not to affect the MSR values ​​that Ginny Mae is concerned about,” said Angel Hernandez, vice president of capital markets at the Housing Policy Council and Ginny’s former director and manager of policy and strategic planning.

Platt went further, suggesting that Ginny is shooting herself in the foot because the offer, if accepted, would likely result in fewer loans invested in Ginny’s securities and could lead to reduced access to credit in general.

“This is a weird form of self-loathing,” Platt said. “I understand that they want to have strong issuers, but basically it says that anyone who needs our assets is not who they want in their program. This is similar to the way Ginny Mae says they don’t want the issuer to want to keep their assets. It just doesn’t seem thoughtful. “



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