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Ginnie Mae announced on Thursday that it will allow relief from its risk-based capital ratio (RBCR) requirements for any mortgage-backed securities (MBS) issuers that effectively hedge the value of their mortgage servicing rights (MSRs). One housing advocacy group said the move will create flexibility for independent mortgage banks (IMBs).
A new memorandum reiterates that beginning on Dec. 31, 2024, “certain issuers and applicants will also be required to maintain a Risk Based Capital Ratio (RBCR) of 6% which is a function of risk weighted assets to Adjusted Net Worth.”
Because MSRs are “generally a significant portion of the issuer’s assets and their values fluctuate due to changes in interest rates,” issuers can reduce their interest rate risk exposure by hedging the MSRs on their books, which helps to “reduce fluctuation in MSR values,” according to the memo.
“Therefore, Ginnie Mae will offer Risk Based Capital requirement relief to Issuers that demonstrate successful hedging over time,” the memo stated.
“As we have said previously, Ginnie Mae will continue to look for ways to adjust our RBCR, where industry practice reflects demonstrable risk mitigation,” Sam Valverde, the company’s acting president, said in a statement. “With RBCR set to go into effect at the end of the year, we are pleased to provide this relief for proven hedging strategies.”
Ginnie Mae will oversee the standards for what constitutes “effective” MSR hedging by “leveraging data submitted quarterly on the issuer’s Mortgage Banking Financial Reporting Form (MBFRF).” It defines “hedging efficiency” as “the proportion of derivative gains/losses used to hedge MSRs relative to the change in MSR values due to market and model changes, as defined in the MBFRF.”
To be eligible for risk-based capital relief, issuers must have hedged at least one of the most recent four quarters, and at least four of the most recent 12 quarters, according to the policy announcement
The Community Home Lenders of America (CHLA) lauded the new development in a statement released Thursday.
“CHLA commends Ginnie Mae for allowing eligible issuers to qualify for RBCR and creating more flexibility for IMBs in the face of Risk-based Capital requirements,” CHLA executive director Scott Olson said. “This initiative will not only increase access to Ginnie Mae for nonbanks, but will also increase access to credit for first-time, minority, and other underserved borrowers.”
The rule reduced the minimum risk-based capital ratio from 10% to 6%. But it also put a 250% risk weight on the MSR asset and the dollar-for-dollar deduction from capital for excess MSRs. The guidance was originally set to go into effect at the end of 2023.
But Ginnie Mae in 2022 announced that the implementation date would be pushed to the tail end of 2024, much to the delight of industry voices who had expressed concerns about the new requirements.
