A&B ABstract

In keeping with broader scrutiny on non-bank servicers, the Federal Housing Finance Agency (FHFA) is proposing new financial eligibility requirement for non-bank servicers doing business with Fannie Mae or Freddie Mac.

The Proposal:

On January 31, the FHFA proposed new financial eligibility requirements for approved nonbank Seller/Servicers doing business with Fannie Mae or Freddie Mac. FHFA will accept comments for 60 days and anticipates that the requirements will be finalized in the second quarter of 2020 and take effect six months thereafter.

FHFA’s announcement follows the Financial Stability Oversight Council’s (FSOC) finding in its 2019 Report to Congress that nonbank mortgage companies are a “potential emerging threat” to the U.S. economy. Specifically, FSOC noted that such nonbanks play a large role in originating and servicing mortgage loans, including those held by Fannie Mae, Freddie Mac and Ginnie Mae securities.

FSOC:

The Dodd-Frank Act created FSOC to identify risks, promote market discipline, and respond to emerging threats to the stability of the U.S. financial system. FSOC comprises 10 voting members (one of which is FHFA), and five nonvoting members (that serve an advisory role).

In its annual report to Congress, FSOC made several statements concerning the potential risks from nonbank mortgage companies. For example, FSOC found that nonbanks “rely heavily on short-term funding sources,” “typically have low capital levels,” and “have few resources to absorb adverse economic shocks.” FSOC concluded that “[g]iven these fragilities, the nonbank sector could potentially be a source of weakness as a contraction in the largest nonbanks’ ability to originate and service mortgages may transit risk to the broader financial system through several channels.” FHFA is taking steps to address FSOC’s concerns.

FHFA’s New Financial Requirements

FHFA proposes the following updates to its minimum net worth and liquidity requirements:

Increased Net Worth for Ginnie Mae Servicing:

FHFA would increase by 10 basis points the minimum net worth requirement to service Ginnie Mae mortgages. Currently, the minimum net worth is $2.5 million plus 25 basis points of the unpaid principal balance for total 1-4 unit residential mortgage loans serviced. FHFA proposes to increase the minimum net worth for servicing of Ginnie Mae mortgages to 35 basis points.

Liquidity Requirements

Increased Minimum Base Liquidity:

Currently, the base liquidity is 3.5 basis points of the aggregate unpaid principal balance of single-family mortgages serviced by the Seller/Servicer for Freddie Mac, Fannie Mae and Ginnie Mae (Agencies). FHFA proposes to increase the base liquidity to 4.0 basis points, plus an additional 10 basis points of the unpaid principal balance of Ginnie Mae servicing.

Reduced Allowable Assets:

FHFA would revise the allowable assets for determining liquidity to exclude the unused/available portion of the committed servicing advance lines of credit. As a result, it would limit allowable assets for liquidity to: (i) cash and cash equivalents and (ii) Available for Sale or Held for Trading Investment Grade Securities: Agency MBS, Obligations of GSEs or U.S. Treasury Obligations.

Changes to NPL Threshold and Charges:

FHFA also proposes increases to the liquidity requirements for nonperforming loans (NPLs), including loans 90 days or more delinquent and loans in the foreclosure process. Under the proposed standards, FHFA would reduce the NPL threshold from 6% to 4%. As a result, a Seller/Servicer would be subject to increased liquidity requirements (in the form of an Incremental NPL Charge) for the portion of non-performing single-family mortgages serviced by the Agencies. The proposal also would increase the Incremental NPL Charge from 200 basis points to 300 basis points. Thus, for NPLs, Seller/Servicers would be subject to an incremental 300 basis point charge for the portion of Agency NPLs that exceeds 4%.

The proposal clarifies that the requirements apply to the master servicer only; loans that are subserviced are not subject to these capital or liquidity requirements. Rather, a subservicer must meet minimum net worth and tangible capital ratio requirements. The minimum capital ratio remains unchanged under the proposal.

Further, FHFA clarifies that only nondepository institutions will be tested against the new liquidity requirements, with reviews done on a quarterly basis. While the proposal requires Seller/Servicers to be in compliance as of the effective date, it also provides Fannie Mae and Freddie Mac latitude to: (1) take appropriate action for a Seller/Servicer who does not maintain compliance; (2) grant exception requests; or (3) institute requirements beyond the minimum for certain Seller/Servicers that pose heightened risk.

Takeaways

Nonbank mortgage servicers should prepare for increased financial requirements taking effect later in 2020. Seller/Servicers concerned with these requirements and how they will be implemented should consider submitting comments to ServicerEligibility@fhfa.gov.

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