Ginnie Mae extends deadline for nonbank capital rule

Ginnie Mae on Friday moved the implementation date for its controversial risk-based capital rule that nonbanks are set to become subject to out a year.

The rule, originally set to go into effect at the end of 2023, now won't be implemented until Dec. 31, 2024, according to the agency, an arm of the Department of Housing and Urban Development that insures securitizations of mortgages backed by other government entities.

The delay acknowledges concerns some companies and trade groups have had about compliance with the rule and the current challenges in the mortgage market.

"Our issuers and the mortgage servicing industry are integral to the government mortgage system, and they are also adapting to market conditions," Ginnie Mae President Alanna McCargo said in a press release. "As always, we are focused on working with our counterparties to manage risks and ensure continuity in serving the most underserved households through all economic cycles."

The rate-driven origination slump and trading volatility are affecting mortgage assets, and credit concerns in Ginnie-backed securitized loans have been higher than in other parts of the market, though they are still historically low. The bond insurer's exposure to credit concerns is limited because other government agencies generally absorb their losses.

Ginnie and its counterparties have become more exposed over time to the credit of Department of Veterans Affairs-backed loans due to the latter agency's partial guarantee, a risk some investor news outlets have flagged recently. But to date, the credit quality of those loans has been strong, with nearly half or 47% of VA mortgages having FICO scores above 720 and the majority, or 67% having scores about 680.

"VA performance is very good because of veterans background and all those kinds of things. They're a government borrower, but a lot different," said Brian Chappelle is a founding partner of Potomac Partners, a Washington-based consulting firm specializing in the mortgage finance industry. 

Ginnie's new capital rule is part of a larger set of mortgage counterparty standards it rolled out with the Federal Housing Finance Agency in August. The two agencies coordinated on some aspects of their rules but not others. For example, the FHFA did not implement a nonbank risk-based capital rule, as it has a different relationship with its counterparties.

Mortgage companies that work with Ginnie issue the securitizations it backs, and the agency's concern is that in the event of an inadequately capitalized issuer fails, its counterparties wouldn't be able to advance the payments to bondholders that the government agency insures. Ginnie has been working to update standards for nonbanks due to their market share growth for some time.

Some mortgage companies and industry associations are concerned that the new rule's 250% risk-weighting for mortgage servicing rights is too high. But Ginnie has defended it, saying the increase is due to the volatility of these assets' valuations.

That risk weighting and formula recently prompted the publicly traded Ocwen Financial to issue a statement indicating it was concerned about the cost of complying with the rule, noting that it might have to shift exclusively to a subservicing model and exit the Ginnie Mae origination and owned servicing market. Ginnie has gone through periods when it has had long lines for issuer approvals and a limited number of subservicers controlling much of its market.

Trade groups like the Mortgage Bankers Association and the Community Home Lenders of America have considered the risk weighting and the formula for calculating risk-based capital as ill-suited for nonbanks, which lack the kind of deposit and breadth of assets their counterparts in the more regulated bank sector have. (However Ginnie's formula for nonbanks was adjusted from an earlier proposal, which would've required a higher capital ratio for nonbanks.)

The community lending group on Friday issued a statement thanking Ginnie for the timeline extension and indicated it hopes the agency will continue to make adjustments in response to industry feedback if needed.

"CHLA continues to request that Ginnie Mae show flexibility in these requirements as it works with issuers, in order to avoid a potential adverse market impact which might result from issuers selling Ginnie Mae MSRs to meet the new requirements," the group said.