Margin call requirement in FHFA proposal draws concern

A liquidity requirement recommended in response to risk that arose during the initial pandemic-related market disruption in 2020 was among aspects of re-proposed minimum eligibility standards for government-sponsored enterprise counterparties drawing focus on Monday.

The 2%-liquidity requirement proposed by the Federal Housing Finance Agency in response to margin calls that occurred two years ago could unnecessarily limit participation in the market if it’s not flexible enough, some commenters said at a public-listening session.

While other aspects of the proposal, such as distinctions it makes for remittance types and coordination with some other government-related agencies, could improve current standards, the margin-call requirement — in combination with other liquidity requirements in the proposal — could set the bar too high, said Bob Broeksmit, president and CEO of the Mortgage Bankers Association.

“Under this proposal, many servicers would have minimum liquidity requirements that are two to five times higher than those in place today,” he said. “While we understand the desire for higher minimum liquidity requirements, an increase of this magnitude would be excessive.”

Suggestions for how to rectify the challenge posed by the requirement ranged from a request for exceptions for small players with minimal risk exposures, to a clarification that would quantify the risk in line with how it is handled practically in the market.

“If FHFA finalizes the 2% hedging requirement…many smaller lenders will make the…decision to give up selling loans to Fannie and Freddie,” said Taylor Stork, executive vice president, chief operating officer at Developer’s Mortgage, and a member of the Community Home Lenders Association.

“At an absolute minimum, CHLA believes that the FHFA should exempt all sellers and servicers that don’t service GSE loans or service to minimum values from the 2% requirement,” Stork said.

The FHFA also might want to consider redefining the requirement to account for circumstances in which market participants effectively consider the risk on a net basis, said Ed DeMarco, president of the Housing Policy Council. The FHFA does not currently appear to make this distinction in arrangements involving the hedging of loans being delivered on a to-be-announced basis into GSE-backed loan pools.

“It is possible that warehouse lenders that also serve as dealers…have entered contracts with nonbank seller-servicers. They permit the positions to be netted against each other daily by the warehouse lender. Such netting results mitigate the nonbanks margin call exposure to the TBA position,” said DeMarco. “Therefore HPC recommends that the origination-liquidity requirement be modified to recognize the offsetting effects of these netted positions when the contracts provide for it.”