Capital rules may radically shift the mortgage industry. Here’s how

The new Ginnie risk-based capital requirements for nonbanks are the last part of a broader set of updated counterparty standards for mortgage companies and they, like proposed regulations at depositories, make it tougher to hold mortgage servicing rights.

Ginnie drew up its overall counterparty updates in coordination with the FHFA, but the risk-based capital rule is unique to the former’s issuers, so its impact would be contained to that  market.

There have been a lot of mixed reactions to the Ginnie rule and debate about whether companies are done repositioning for it or not.

So with pending bank regulation potentially making it tougher for depositories to hold mortgage servicing rights around the same time that the Ginnie rules could be doing the same, there could be pullback from the government market on both sides.

“While many nonbank mortgage firms have publicly announced they’re ready to implement the amended capital and liquidity requirements, there is talk about the impact of having the appetite to originate and price demand for MSRs, not to mention future advance rate and covenants required by bank warehouse lenders,” said JB Long, president of Incenter Mortgage Advisors. “I think that’s where that component and the Basel component kind of intersect.”

There will likely be limits to the impact on servicing in general though, given the nonbank capital restriction doesn’t extend to the large GSE market, he said.

Also even with stricter capital rules in place, MSRs can have attractions related to customer acquisition, so although some nonbanks have said they may switch to subservicing to avoid the impact, others have said they’ll stay in the game and benefit from it. Banks likely will too.

Customer value can keep servicing attractive even if currently high interest rates that support it were to fall, diminishing its financial appeal and increasing origination opportunities. (Servicing and originations naturally hedge each other from rate moves.)

“There are those that may want to hang on to it because they have recapture platforms,” Long said.

And it would be primarily depositories above a certain threshold that would shed MSRs, or just let their business go into runoff, if the bank rules were to be finalized as proposed, he added. 

Still, there’s anticipation the intersection of the two rules could hit the government market disproportionately and create additional complications for reverse mortgages, which are equity withdrawal loans for seniors that the FHA insures and Ginnie securitizes.

The intersection of rate volatility and policies related to loan pooling that require Ginnie issuers to hold loans on financing lines for prolonged periods have pressured this sector’s liquidity.

“That’s a narrow space. There have been a couple of failures over the last year in that market and seizing of certain assets,” Long said.

It’s a concern government officials are aware of and have been working to remedy via policy. Private capital markets players also could potentially play a role.