Small mortgage companies seek suspension of tighter GSE requirements
A proposal to tighten financial requirements for government-sponsored enterprise counterparties that sought to lower risk in a volatile market should be suspended, a group representing smaller lenders said, arguing it would aggravate current distress.
"In this environment, it would be destabilizing to establish significantly more stringent net worth and liquidity requirements," the Community Home Lenders Association said in a letter to Mark Calabria, director of the Federal Housing Finance Agency.
The group seeks a six-month suspension of the proposal, and if it is implemented later, would like to see exemptions for small players in circumstances when requirements could be counterproductive.
The CHLA shows particular concern about new liquidity requirements in the proposal, which are higher for mortgage companies that also are Ginnie Mae servicers.
That may address the fact that the loans in government bond-insurer Ginnie Mae's securitizations are primarily Federal Housing Administration-insured mortgages, which tend to have high delinquency rates than GSE mortgages. FHA loans, however, help address certain affordability constraints for borrowers the GSEs don't.
Unadjusted for any difference in criteria, the latest monthly serious-delinquency rate for FHA loans was 4.12%, as opposed to less than 1% for Fannie Mae. Freddie Mac's seriously delinquent rates were even lower recently. Those numbers are expected to rise dramatically due to the coronavirus' impact.
While the GSEs' requirements are similar to Ginnie's own, Ginnie makes distinctions when it comes to company size that the FHFA and the GSEs don't, according to the CHLA.
"Ginnie Mae has explicitly acknowledged substantive differences in financial and systemic risk between its largest and smallest issuers, including introducing the concept of stress testing only for its largest issuers," the CHLA noted.
The FHFA proposal "appears to ignore differences between large and small servicers," according to the trade group.
If the FHFA does move ahead with its plan, it could end up with a smaller number of counterparties with arguably stronger financial profiles, but at the same time it would increase concentration risk.
This could make distressed-servicing resolution more costly "both because of the portfolio size and the relative ability of other servicers to take over a portfolio."
Servicers have responsibilities related to advancing funds when loans are distressed that are putting strain on their operations at the same time the valuations of mortgage servicing rights some have exposures to are being damaged by low rates that spur prepayments.
However, many servicers also have origination arms that are experiencing strong demand due to low rates.