‘Nonbank SIFI designations would be ill-suited for servicers’

Mortgage and housing trade groups this week pushed back against a Financial Stability Oversight Council proposal aimed at reverting its review process to one in which it would be easier to designate nonbank servicers and others as systemically-important financial institutions.

Housing Policy Council President Ed DeMarco said in a letter that his group opposed the move away from the existing “activities-based approach,” in which other oversight agencies are the first line of defense before labeling an individual company a SIFI, because that has had demonstrable benefits.”

Since FSOC began raising concerns regarding nonbank mortgage lenders, various regulatory bodies and federal program agencies, including the Federal Housing Finance Agency, Ginnie Mae [and others] have taken steps to strengthen the capital rules, liquidity requirements, operational restrictions, mortgage servicing responsibilities, and consumer protection rules that apply to such companies,” said the former FHFA acting director.

In addition, when other oversight agencies potentially engage in counterproductive rulemaking from a risk management perspective, the existing approach is helpful, DeMarco said in his letter.”Another advantage of an activities-based approach is that it can address risks created or exacerbated by governmental policies,” the letter to FSOC said.

The HPC cites as an example the somewhat open-ended advancing risk in the large market for securitized government-guaranteed mortgages, which are backed by Ginnie Mae, an arm of the Department of Housing and Urban Development.

That risk, which is associated with servicers being able to cover payments delinquent borrowers aren’t making until the loan undergoes certain foreclosure procedures or engages in modification options, has been central in concerns about liquidity at nonbanks.

The HPC’s membership of mortgage companies, insurers and settlement service providers has long advocated for Ginnie to revise acknowledgement agreements that govern the rights of parties in financing agreements secured by servicing rights in ways that would encourage private corporate lenders to provide more liquidity. But efforts to do that to date have fallen short, it said.

“FSOC highlighted this issue in its 2022 annual report, but treated it as a liquidity concern with nonbank servicers, not as a consequence of Ginnie Mae policy. An activities-based approach could address this issue, to reduce or remove significant risk from the system,” DeMarco said in the letter. (Ginnie Mae has said it wants to have a permanent liquidity backstop for servicers.)

Members of another trade group made similar points in a letter to the Financial Stability Oversight Council, and noted in an emailed press statement that they “oppose a SIFI designation of any independent mortgage bank servicer.”

The scale of nonbank servicers should be kept in mind when it comes to SIFI designations, Bob Broeksmit, president and CEO of the Mortgage Bankers Association, said in the letter.

“Even today’s largest nonbank servicer has balance sheet assets well below the original asset threshold Congress established for banks in 2010,” Broeksmit said in a footnote within the missive.

Those holdings also are “at least eight times smaller than the current asset threshold established by Congress in 2018, at least 20 times smaller than any of the nonbank entities FSOC has previously attempted to designate and at least 100 times smaller than the balance sheet assets of their largest counterparties,” he added.

A Financial Stability Oversight Council proposal aimed at reverting its review process to one in which it would be easier to designate nonbank servicers and others as systemically-important financial institutions.

Housing Policy Council President Ed DeMarco said in a letter that his group opposed the move away from the existing “activities-based approach,” in which other oversight agencies are the first line of defense before labeling an individual company a SIFI, because that has had demonstrable benefits.”

Since FSOC began raising concerns regarding nonbank mortgage lenders, various regulatory bodies and federal program agencies, including the Federal Housing Finance Agency, Ginnie Mae [and others] have taken steps to strengthen the capital rules, liquidity requirements, operational restrictions, mortgage servicing responsibilities, and consumer protection rules that apply to such companies,” said the former FHFA acting director.

In addition, when other oversight agencies potentially engage in counterproductive rulemaking from a risk management perspective, the existing approach is helpful, DeMarco said in his letter.”

Another advantage of an activities-based approach is that it can address risks created or exacerbated by governmental policies,” the letter to FSOC said.

The HPC cites as an example the somewhat open-ended advancing risk in the large market for securitized government-guaranteed mortgages, which are backed by Ginnie Mae, an arm of the Department of Housing and Urban Development.

That risk, which is associated with servicers being able to cover payments delinquent borrowers aren’t making until the loan undergoes certain foreclosure procedures or engages in modification options, has been central in concerns about liquidity at nonbanks.

The HPC’s membership of mortgage companies, insurers and settlement service providers has long advocated for Ginnie to revise acknowledgement agreements that govern the rights of parties in financing agreements secured by servicing rights in ways that would encourage private corporate lenders to provide more liquidity. But efforts to do that to date have fallen short, it said.

“FSOC highlighted this issue in its 2022 annual report, but treated it as a liquidity concern with nonbank servicers, not as a consequence of Ginnie Mae policy. An activities-based approach could address this issue, to reduce or remove significant risk from the system,” DeMarco said in the letter. (Ginnie Mae has said it wants to have a permanent liquidity backstop for servicers.)

Members of another trade group made similar points in a letter to the Financial Stability Oversight Council, and noted in an emailed press statement that they “oppose a SIFI designation of any independent mortgage bank servicer.”

The scale of nonbank servicers should be kept in mind when it comes to SIFI designations, Bob Broeksmit, president and CEO of the Mortgage Bankers Association, said in the letter.

“Even today’s largest nonbank servicer has balance sheet assets well below the original asset threshold Congress established for banks in 2010,” Broeksmit said in a footnote within the missive.

Those holdings also are “at least eight times smaller than the current asset threshold established by Congress in 2018, at least 20 times smaller than any of the nonbank entities FSOC has previously attempted to designate and at least 100 times smaller than the balance sheet assets of their largest counterparties,” he added.