Why Ginnie Mae’s capital rules have remained a sticking point for some

At the heart of many critics’ opinions has been a longstanding industry argument that risk-based capital standards traditionally used by depositories shouldn’t be applied to institutions that aren’t.

Banks hold a range of mortgages and other assets on their balance sheets over the long term. Nonbanks act more as “middlemen” who hold a more limited set of mortgage-related assets until they can be sold, and temporarily advance funds to bondholders on Ginnie’s behalf when mortgage borrowers don’t pay.

“Applying a bank-wide capital standard risk used by entities that hold multiple asset classes to non-risk taking entities that are single class or monoline in their structure, it’s just nonsensical,” David Stevens, CEO of mortgage advisory firm Mountain Lakes Consulting, and a former housing and trade group official.

Some experts think adjusted risk-based capital might be adaptable to nonbanks in some form. However, for companies that don’t have a broad variety of assets like banks do, a risk weighting for 250% may seem daunting.

“The 250% in the current capital rules is extremely harsh on MSRs. The question is could they have done something that acknowledges the volatility but been a little bit gentler?” Laurie Goodman, a fellow at the Urban Institute’s Housing Finance Policy Center, said.

One of her co-authors of research on the capital rule, former Ginnie Mae President of Ted Tozer, thinks there might’ve been ways to make the rule more manageable for nonbanks even if they didn’t want to change the MSR risk weighting, such as including allowances for non-depositories’ use of longer-term debt or hedging, 

“Those are a couple things, at least in my thoughts, that they really need to incorporate and if they did that I think would take care of a lot of the issues coming from the mortgage banking community,” Tozer said. 

But Ginnie’s has specifically ruled out these options. 

“While debt with longer maturities may be helpful in managing liquidity risk, debt is not ‘loss absorbing’ in the sense of guarding against insolvency,” Ginnie said in a FAQ on its rule. It calls MSR values too “opaque” to offer credit for hedging them.

Issuers do have other options if the MSR weighting is a challenge. Ocwen’s contemplating shifting more to subservicing due to the new rule. However, that could lead to counterparty concentration risk in Ginnie MSR holdings if too many issuers do it, according to Christopher Whalen, an analyst who’s worked with that company.

The new rule is “going to come with a cost which will reduce the value of servicing rights and thus increase government mortgage rates to consumers,” Stevens predicts. “It will likely create consolidation because some won’t be able to comply with it.”

Karan Kaul, a principal research associate at the institute, is more concerned about cost than consolidation or ability to comply.

“The issue, I think, is what it does to access to credit, and mortgage rates, because at the end of the day, all of this is going to get passed on to the borrower,” he said.

Some issuers say they don’t really have trouble complying, but they’d like to have a better idea of why the bond insurer finds the risk weighting in particular important, and how Ginnie envisions it affecting issuers where MSRs need to be marked down.

“Ninety-five percent of their companies are okay with the new capital requirements, but what happens if there’s a change and markets move more rapidly and it impacts certain lenders negatively?” Steve Adamo, president of national retail production at Embrace Home Loans asked. 

“I do think that Ginnie goes into this with all of the right intentions,” he added. “And I would like to think that if this turned into a problem that they would work with the lending community.”