DALLAS — As servicing has shifted to nonbanks from banks, regulators have focused on better controlling nonbanks' counterparty risk.
Managing counterparty risk is often equated with banks' capital requirements, but that's not always the case, said Michael Stevens, senior vice president of regulatory policy for the Conference of State Bank Supervisors. Capital rules are not the be-all and end-all when it comes to improving the management of nonbank counterparty risk.
"Capital only gets you so far," Stevens said during a panel discussion at the Mortgage Bankers Association's national servicing conference in Dallas.
Measures related to liquidity, transactions with affiliates, transfers, technology and data also are important in managing counterparty risks, said Stevens, who's also involved with the Financial Stability Oversight Council.
Capital does not necessarily determine who is a good servicer, Ed Fay, chief executive of Fay Servicing, said in an interview.
Nonbanks should have scale thresholds, but with flexibility on the forms of capital they hold, he said. Most current proposals suggest the capital should be equity, but Fay thinks capital could also be held in debt instruments such as servicing-financing vehicles. Those vehicles can provide a source of liquidity as well, he said.
"You have to have enough liquidity to make advances, but that doesn't have to be in the form of direct capital," Fay said.
It strains nonbank servicers to require them to set aside capital and also limits their options, since they are already wrestling with high regulatory costs, he said. Capital requirements could affect servicers' ability to devote resources to effective loss mitigation.
Some nonbanks feel capital requirements discourage diversification among market participants and their participation in the market because they put more constraints on their financial options and bar smaller players. Others thinks capital requirements mean that the Federal Housing Finance Agency "does not like nonbanks," said Maria Fernandez, the agency's associate director for the Office of Housing and Regulatory Policy.
"But it's not true," she said. "Additional players support the market."
While it may be somewhat of a challenge for servicers, regulatory safeguards for liquidity need to be based on "cash on hand, not debt capacity," Leslie Meaux, director of monitoring and asset management at Ginnie Mae, told attendees.
The business is "cash intensive," Meaux said in an interview. Ginnie Mae does not want to limit its issuers' financial flexibility, but it needs capital requirements, given historical counterparty risks related to leverage and debt that loomed large in the last downturn.
Some of the regulatory change in the works for government counterparties in response to shifts in the market could have some financial advantages for mortgage companies.
The Federal Housing Administration could adjust curtailments in situations where servicers fail to meet its foreclosure timelines, bringing them in line with rapid changes in state rules that affect them.
This would help ensure "the penalty fits the crime," said Kathleen Zadareky, deputy assistant secretary of single-family housing at the FHA. But the change would have to go through a comment period and could take a while to implement, she said.
