Ginnie Mae's nonbank servicing share is inching up in '22

Ginnie Mae's nonbank servicing share has continued to climb this year, albeit at a slower pace than in 2021, according to new analysis of data from multi-issuer mortgage-backed securities pools.

The share of the large nonbank servicers in this market, which is the largest that the government agency insures, has climbed to 72% so far in 2022 from 71% last year, according to data from FHN Financial, an affiliate of First Horizon Bank and CPR & CDR, a prepayment analytics provider.

The number is significant in the context of the counterparty standards Ginnie recently revised in coordination with the Federal Housing Finance Agency, as nonbanks are "the main targets" for the new requirement, FHN noted in the report.

While nonbank servicer growth has slowed, overall it has been a steep climb since 2013, which means there's an ongoing need to specifically manage their risk, FHN said.

"The point is the nonbank market share has roughly quadrupled in the last decade," Walter Schmidt, senior vice president, mortgage strategies at FHN Financial, said in an interview.

Back in 2013, large nonbanks accounted for just 21% of the servicing in the Ginnie Mae II market, and top-five depositories held a 76% share. Today, those numbers have almost flipped at 72% for large non-depositories, 14% for top-five banks and another 14% in the hands of smaller players.

The share of small institutions in the market jumped to 15% in 2020 from just 3% the year before, as falling rates weighed on mortgage servicing prices, making the asset less attractive to sell. The share of smaller players held relatively steady compared to 2020, when it was 14%.

Ginnie and the FHFA's charges, Fannie Mae and Freddie Mac, back a sizable portion of all U.S. mortgages; and the coordination of some of the two markets' counterparty requirements has gotten a warm response from investors for that reason, according to the FHN report.

But the requirements and pricing of the two markets still differ in some respects and FHN speculated that the end result could reflect a difference in prepayment expectations that's arisen from the pending risk-based capital requirements that are unique to Ginnie. 

"One of the reasons that higher coupon Ginnies have outperformed conventionals in the current month…is the market's view that these more restrictive capital requirements will reduce refi competition somewhat in the [Federal Housing Administration] and [Department of Veterans Affairs] markets," FHN speculated in the report.

(Ginnie insures securitizations of loans backed by other government entities such as the FHA, which, like the bond insurer, is an arm of the Department of Housing and Urban Development. )

Overall, MBS investors have been responding positively to the fact that new Ginnie requirements are generally tighter than old ones (although not as strict as some previously proposed), FHN noted, confirming earlier reports from the securities industry.

Meanwhile, servicers and lending groups that have continued to study the new rules are saying that they like some but not all aspects of them.

For example, the Mortgage Bankers Association has welcomed the fact that the FHFA retained a distinction made for remittance types, and an elimination of incremental charges for nonperforming loans that had been in the agency's most recent re-proposal of the rules.

"You would have to  hoard liquidity at precisely the time you needed to deploy the liquidity for advances. So we were happy that that was taken out of the final version," Pete Mills, senior vice president, residential policy, at the MBA. said of the removal of the NPL measure.

Remittance adjustments made based on the extent to which gaps exist between payments made by borrowers and the time they're passed through to investors also was helpful because they will properly differentiate those risks, he said. 

However, while the Ginnie capital requirement of 6% set to go into effect late next year was welcome in that it was lower than the previously proposed 10%, the MBA is still concerned about the bank-based risk weighting for assets, which is particularly high for mortgage servicing rights.

"If you are going to have any sort of risk-based framework, taking one from the international banking regulations and applying it to a monoline nonbank we don't think makes a whole lot of sense," said Mills.

Ginnie does apply a formula to calculations for the minimum risk-based capital ratio that differs from the one typically used in the banking world but it also isn't necessarily the best fit for nonbanks, he said. 

"The calculation of the numerator is different and that's your net worth minus your excess MSR. It lowers your ratio," Mills said, noting that Ginnie defines "excess" as the amount of servicing rights above a company's net worth and divides that number by risk-weighted assets.

"The risk weight [for MSRs] and that deduction, both are problems," said Mills.