Ginnie Mae has made an announcement that it will provide relief from its risk-based capital ratio (RBCR) requirements for mortgage-backed securities (MBS) issuers who effectively hedge the value of their mortgage servicing rights (MSRs). This move is seen as a positive development for independent mortgage banks (IMBs) by a housing advocacy group.
A recent memorandum states that starting on Dec. 31, 2024, certain issuers and applicants will need to maintain a Risk Based Capital Ratio (RBCR) of 6%, calculated based on risk-weighted assets to Adjusted Net Worth.
Due to the volatility of MSR values caused by changes in interest rates, issuers can mitigate their interest rate risk by hedging their MSRs, leading to reduced fluctuations in MSR values as outlined in the memo.
Ginnie Mae will offer relief from Risk Based Capital requirements to issuers who can demonstrate successful hedging strategies over time, as stated in the memo.
Acting president of Ginnie Mae, Sam Valverde, mentioned, “Ginnie Mae will continue to explore opportunities to adjust our RBCR to align with industry best practices in risk management. With the RBCR approaching at the end of the year, we are pleased to provide this relief for proven hedging strategies.”
Ginnie Mae will monitor the criteria for “effective” MSR hedging by analyzing data submitted quarterly on the issuer’s Mortgage Banking Financial Reporting Form (MBFRF), defining “hedging efficiency” based on derivative gains/losses relative to changes in MSR values due to market and model variations per the MBFRF.
To qualify for risk-based capital relief, issuers must have hedged in 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) praised this development, stating, “CHLA applauds Ginnie Mae for allowing eligible issuers to meet RBCR requirements and granting more flexibility for IMBs in light of Risk-based Capital regulations. This initiative will not only expand Ginnie Mae access for nonbanks but also enhance credit availability for first-time, minority, and other underserved borrowers.”
The rule has lowered the minimum risk-based capital ratio from 10% to 6% but also introduced a 250% risk weight on the MSR asset and a dollar-for-dollar deduction from capital for excess MSRs. Originally planned for implementation by the end of 2023, Ginnie Mae announced in 2022 that the implementation date would be postponed to late 2024, easing concerns raised by industry stakeholders about the new requirements.
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