Ginnie Mae's ruler is 'the elephant in the room' for the MSR market

Ginnie Mae’s ruler is ‘the elephant in the room’ for the MSR market

Mortgage industry executives echo the sentiment that Ginnie Mae’s risk-based capital requirement is currently the top concern for companies holding mortgage servicing rights (MSRs). According to industry leaders, the rule can force a wave of selling, reduce values ​​and put some lenders and services in a difficult situation.

“It’s ‘the elephant in the room’ right now. Obviously it’s been delayed. But, to date, it hasn’t been changed,” said Michael Carnes, Managing Director of MSR Valuation Group at Mortgage Industry Advisory Society (MIAC).

The executive spoke on a panel at the 8th Annual Residential Mortgage Servicing Rights Forum, a conference held in Manhattan on Nov. 14-15.

The Risk-Based Capital Requirement – ​​which reduced the minimum Risk-Based Capital Ratio from 10% to 6% but granted a 250% risk weighting on the MSR asset and the dollar-for-dollar deduction of the capital for excess MSRs – has been set will come into effect at the end of 2023.

But in late October, Ginnie Mae announced that it had extended the mandatory implementation date for non-banks to December 31, 2024.

The new rule has caused widespread consternation, with critics saying the policy does not match the risk. Government and conforming loans held for sale would have a 20% risk weight. Other loans held for sale would have a 50% risk weighting.

At the MSR forum, executives said they had no objection to an additional capital requirement, but there was no loss history to justify the 250% risk weighting on the active MSR.

What to expect

In response to criticism, Ginnie said in a statement that if the new capital rule were in effect today, “95% of our issuers (by number) would be compliant. Of the issuers already RBCR compliant, many have sufficient equity to support the acquisition of MSRs that may go to market.

Leaders refute this explanation. According to John Bosley, President of Mortgages at Planet Home Lendingthe idea that 95% of companies will be eligible for the new risk-based capital rule is a “bit hypocritical”.

According to Bosley, the top 20 or 25 issuers control most of Ginnie Mae’s services, and the banks are already not keen on servicing these loans.

“You take a few of these (20 or 25 emitters) out of the mix, and you’re down 10%, 20%, or 30% (compliant),” he said. “It’s a scary situation.”

Taylor Stork, Chief Operating Officer at Developer’s Mortgage Companysaid estimates for 95% of lenders complying with the rule were based on financial data from a quarter ago, and rates have moved significantly since then.

“The other piece of that: We know there are 11 companies that basically wouldn’t be graceful. What are these 11 companies going to do? They’re going to sell MSRs,” Stork said. “And what happens when they sell it? They will depress it (the market). What happens when it starts to drop? Everyone’s ratio changes. So who is number 12? Who is number 13?

Bosley gave an estimate of the impact, saying: “When we ran the map on what the rule could potentially do to the MSR market, we believe it could cause MSR values ​​to drop 10% to 20% in a normal market.

The current MSR market

Rising interest rates and falling prepayment terms have boosted MSR multiples in 2022, but there have been signs of relief in recent weeks.

“The MSR market has softened considerably,” Carnes said. “What was a market multiple of 5.5 is now, generally speaking, a market multiple of 4.8. This is primarily 2020 and 2021 origination, as we are still not seeing a significant amount of the 6% traded products. »

A multiple is a measure of the price of an MSR loan pool, which is expressed as a percentage of the outstanding principal balance divided by the servicing fee.

According to MIAC, in the first half of 2022, agency MSR sales of more than $2 billion — primarily from 2020 and 2021 origins — traded at multiples greater than 5.25 times. Meanwhile, Ginnie Mae’s MSRs, representing higher risks, were trading at 4x higher.

“It seems like once you get that 200 basis points from the money at a multiple of 4.8 times, the levels start to flatten out a bit,” Carnes said.

The number of offers has also improved recently. During the first and second quarters, 20-24 buyers would show interest in an MSR auction of $5 million, resulting in an average of 12 bids. After that, it was reduced to three or four bids per auction due to bandwidth constraints, budget constraints, capital constraints, etc.

Carnes said he has now moved to six to seven bids per auction.

“We’ve seen people out there, on both sides, coming back to test the waters,” said Jay Patel, chief executive of Blue Water Fintech.

#Ginnie #Maes #ruler #elephant #room #MSR #market

Leave a Comment

Your email address will not be published. Required fields are marked *