Seth Sprague, CMB, of Richey May: Now’s the Time to Prepare for FHFA/Ginnie Mae Rules Changes for Non-Bank Servicers

Seth Sprague leads the Mortgage Banking Consulting Services practice with Richey May, Denver. A sought-after speaker, he often speaks on liquidity, profitability and the overall challenges in the mortgage industry. For more information please visit www.richeymay.com.

On August 17, 2022, the Federal Housing Finance Agency and Ginnie Mae jointly announced updated minimum financial eligibility and capital rules for seller/servicers and issuers. These changes update the capital and financial eligibility requirements for non-bank servicers that have been modified over the past year. The joint announcement revealed general alignment between the two agencies; however, there are key areas of differentiation. Understanding the new requirements is critical for seller/servicers and issuers to maintain compliance; however, these changes also raise potential strategic and operational challenges in the future.

The updated rules impose higher capital requirements on non-bank servicers, including a new risk-based capital ratio for Ginnie Mae, and require non-bank servicers to maintain minimum levels of net worth and liquidity. These requirements will affect non-bank servicers of loans guaranteed by the FHFA and Ginnie Mae, including those that service mortgages backed by Fannie Mae, Freddie Mac, and the Federal Housing Administration.

The effective date(s) for the calculations vary and are as follows: 

September 30, 2023

• Tangible Net Worth/Eligible Liquidity
• Net Worth
• Base Liquidity
• Liquidity and Origination (if needed) Buffer

December 31, 2023

• Origination liquidity
• Third-Party Ratings (Fannie Mae/Freddie Mac only)

March 31, 2024

• Fannie Mae and Freddie Mac capital liquidity plan

December 31, 2024

• Risk-Based Capital (Ginnie Mae only)
• Capital Ratio is currently in effect for Fannie Mae, Freddie Mac and Ginnie Mae
• Tangible Net Worth (FHFA) and Adjusted Net Worth (Ginnie Mae)

Given that these rules will begin to take effect starting at the end of the third quarter this year, now is the time for lenders to prepare and understand how these changes can affect their strategy.

A Closer Look at 2.0 Changes, Differences

There is general alignment around the Tangible Net Worth (FHFA) and Adjusted Net Worth (Ginnie Mae) requirements in 2.0, with Ginnie Mae including a “valuation adjustment of certain assets” as a deduction from Total Equity, but otherwise, the calculations are similar. For both the FHFA and Ginnie Mae calculation, the ratio must be greater than or equal to 6%. Ginnie Mae is giving themselves, as a deduction from equity, a valuation adjustment of certain assets that is not defined. In essence, Ginnie Mae wants the ability to look through the financials and determine that an asset needs to come out of the calculation.

For the Minimum Net Worth, there is alignment between the FHFA and Ginnie Mae calculations with $2.5 million plus 25 bps (times the outstanding unpaid balance) for Fannie Mae/Freddie Mac/Private/Other servicing and 35 bps times the outstanding unpaid balance for Ginnie Mae servicing. This calculation is unlikely to trip up any issuers or servicers.

For Base Liquidity, there is also alignment between the FHFA and Ginnie Mae with Ginnie Mae servicing requiring 10 bps times the outstanding UPB and Private and Other servicing requiring 3.5 bps times the outstanding UPB. For Fannie Mae/Freddie Mac servicing, the new rules now differentiate based on the servicing remittance with Actual/Actual being charged 3.5 bps (times the unpaid balance), Scheduled/Scheduled and Scheduled/Actual requiring 7 bps (times the unpaid balance). This is the first time the different remittance types are receiving different liquidity treatments.

For mortgage originators that have $1.0 billion or more in total originations over the prior four quarters, there is an additional origination liquidity requirement of 50 bps times the (loans held for sale plus pipeline loans with interest rate lock commitments after fallout adjustments).

Regarding Eligible Liquidity and allowable assets, there are key differences: The FHFA allows for 50% of the unused committed servicing advance lines of credit to be counted, while Ginnie Mae allows for PI, T&I and Foreclosure advances to be included as allowable assets.

Another area of difference is that FHFA requires Large Non-Depository servicers (defined as $50 Billion or more in single-family servicing unpaid balance), to meet additional requirements and calculations and requirements that include:

• A Liquidity Buffer of 2 bps on Fannie Mae/Freddie Mac servicing and 5 bps on Ginnie Mae servicing
• Having a Third Party and Credit Rating that increases as their servicing portfolio size grows.
• Greater than $50 billion must have one primary servicer or master servicer rating.
• Greater than $100 billion must have one primary servicing rating and one third-party long-term senior unsecured rating or long-term corporate family rating.
• Greater than $150 billion must have one primary servicing rating or a master servicing rating and two third-party long-term senior unsecured ratings or long-term corporate family ratings.

A required Capital and Liquidity Plan, which includes MSR stress tests as part of their annual capital and liquidity plans, goes into effect March 31, 2024.

Finally, there’s been a lot of discussion in the industry press on the inclusion of the Ginnie Mae Risk-Based Capital Rule (RBCR). If you have your Ginnie Mae servicing ticket, even if you don’t have any Ginnie Mae servicing, you will be subject to those risk-based capital rules by Ginnie Mae.

In essence, non-bank Ginnie Mae ticket holders have to risk-weight each asset on the entire balance sheet, per the categories that Ginnie Mae is providing. For those new to the concept of risk-weighting assets, a zero risk-weighted asset is something that is good, and is deemed risk-free, like cash. When you see that MSRs have a weighting of 250%, that means there is more risk. So, the larger the risk-weighted assets, the more adjusted net worth is needed to cover it in order to be greater than 6.0%.

This requirement was initially scheduled for release December 31, 2023, but delayed until December 31, 2024. Because there may be confusion around how to calculate risk-weighted assets, the time to understand the calculation is now.

Fannie Mae and Freddie Mac do not have this requirement on risk-based capital.

Start Preparing Now

It is imperative that all seller/servicers and issuers understand the new requirements and begin to use the calculations to understand if and how their servicing strategy needs to change. Those that outsource their servicing to a third-party will also need to coordinate with their subservicer to ensure the appropriate strategy adjustments are made. In addition to the calculation, it is important to understand how the changing mortgage market conditions could impact compliance. With the first deadline mere months away, lenders should start working on these changes now and be proactive with testing new calculations on their existing portfolio so rollout is as smooth and error-free as possible.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Michael Tucker, Editor, at mtucker@mba.org.)