Robust Financial Guidelines on Tap for Fannie Mae and Freddie Mac Seller/servicers and Ginnie Mae Issuers

• Jurisdiction: United States,Federal
• Citation: Vol. 1 No. 2
• Publication year: 2023
• topic: Banking and Finance Law

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Amy McDaniel Williams, Edward L. Douma, Brit Mohler Dufilho, William J. Van Thunen, and Claudia H. Fendian ^*

In this article, the authors explain the new financial eligibility requirements for Fannie Mae and Freddie Mac seller/servicers and Ginnie Mae issuers.

Regulation is like a knife: used as a scalpel, regulation can provide protections for vulnerable Americans; used as a machete, regulation can convince businesses to withdraw from sectors providing services to Americans, thus unintentionally harming people. Similar to the sharpening of a good knife, good regulation becomes scalpel-sharp by being scraped over hard questions; shedding imperfections where necessary and honing in where essential. Are recently promulgated rules governing mortgage servicers, which will not take effect until late-2023, scalpels or machetes? Agency action suggests the Federal Housing Finance Agency (FHFA) and the Government National Mortgage Association (Ginnie Mae) are committed to honing the minimum financial eligibility requirements governing mortgage servicers and creating a more secure environment for consumers and investors.

Over the past decade, regulated banks have exited the mortgage servicing business, selling their mortgage servicing rights (MSRs) to nonbank servicers, including hedge funds, who are not regulated as banks. For instance, at Ginnie Mae, nonbank servicers now handle 64% of the servicing for new loans, whereas in 2011 nonbank servicers handled only 6% of Ginnie Mae servicing. Regulators have expressed concern about the role of nonbank mortgage servicers. Will they have access to credit in times of stress? Will their drive to increase returns to investors lead them to cut corners and violate the law or consumers' rights?

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With these concerns in mind, the FHFA and Ginnie Mae worked together to update financial eligibility requirements for Fannie Mae and Freddie Mac seller/servicers and Ginnie Mae issuers. On August 17, 2022, they jointly announced ¹ more robust minimum financial eligibility requirements for seller/servicers and issuers, which will first take effect on September 30, 2023. While these updated requirements were adopted with the goals of maintaining the safety and soundness of Ginnie Mae and the Government-Sponsored Enterprises (GSEs) and improving alignment among Fannie Mae, Freddie Mac and Ginnie Mae participants, they diverge as noted in the tables below.

These heightened requirements and this divergence have already caused some seller/servicers and issuers to question their ability to continue to service Ginnie Mae MSRs at current levels, particularly in light of the new Risk-Based Capital requirements discussed below. A product of Ginnie Mae's engagement with its issuer community, the recently released Frequently Asked Questions about Ginnie Mae's Amended Eligibility Requirement ² sheds additional light on Ginnie Mae's rationale for the amended eligibility requirements and foreshadows how the requirements may impact issuer's financing of MSRs after the effectiveness of the amended eligibility requirements.

The year leading up to the effective date for these new guidelines gives servicers time to plan and execute strategies for coming into compliance. Ginnie Mae has expressed that, while it believes that this time is sufficient time to bring affected issuers into compliance, it needs to understand issuers' strategies to ensure that compliance efforts do not cause dislocations in the MSR market. Lack of transparency in the MSR market adds to uncertainty about true value and may serve to increase price volatility.

Key Differences from Current Requirements

FHFA Requirements

The...