MBA Comments on SEC Margining Proposal; Seeks Multifamily Exemption

Multifamily housing and residential healthcare agency markets should not be subject to proposed margin requirements on forward-settling agency securities, the Mortgage Bankers Association said in a letter to the Securities Exchange Commission. 

The SEC published a Financial Industry Regulatory Authority-proposed rule amending FINRA Rule 4210 to establish margin requirements in the single-family “to-be-announced” market, but the rule also scopes in the multifamily housing finance programs of Fannie Mae and FHA/Ginnie Mae. MBA filed supplemental comments with the SEC regarding the proposed rule. 

“We continue to believe that the multifamily housing and residential healthcare agency markets should not be subject to the proposed margin requirements during the multifamily agency financing and securitization process,” MBA President and CEO David Stevens, CMB, said in the letter. “The multifamily housing finance market was not the reason why the proposed margin requirements had been developed–as evidenced by the absence of multifamily-related economic analysis or substantive discussion in the proposal–nor does this market present the systemic and counterparty risks that appear to have motivated the development of the proposed rule.”

Stevens said multifamily agency finance already includes strong safeguards including Good Faith Deposits, stringent agency oversight and underwriting and business protocols that align the interests of the parties to the multifamily lending transaction.

“The proposed rule should clearly exclude new-issue multifamily transactions from coverage under the proposed margin requirements,” Stevens said.

The supplemental information MBA submitted in its Jan. 11 letter illustrated the prescreening, underwriting and issuance process for typical multifamily loans under both Fannie Mae’s Delegated Underwriting & Servicing program and HUD/FHA’s section 223(f) program. MBA noted that both processes align the interest of all parties to complete the transaction and deliver the security to the investor. “This, in turn, acts as a strong mitigant against trade fails,” Stevens said. “Notably, the credit performance of the multifamily agency portfolios has been exceptionally strong as well.”

Stevens said if all underwriting requirements, contractual terms and agency-provided guidelines are met, a rate-lock agreement is executed between the borrower and the lender. “The borrower has a strong incentive to lock the interest rate as soon as possible to solidify loan terms,” he said. “The rate lock is a legally binding commitment, which among other things requires a Good Faith Deposit to be provided to the lender. The Good Faith Deposit is paid to or held for the benefit of the broker-dealer or the investor of the security.”

The lender also performs due diligence on the borrower entity, the income-producing multifamily rental property and the broker-dealer, Stevens said. This due diligence includes reviewing financial statements, credit ratings and establishing counterparty exposure limits among other things.

“Given these strong safeguards imbedded in the multifamily loan underwriting process, we believe the proposal should exclude new-issue multifamily finance transactions from the proposed margin requirements,” Stevens said.