FHFA receives feedback on proposed liquidity requirements
During the market disruption in March 2020, the value of mortgage servicing rights was temporarily disconnected from mortgage rates.
Major mortgage sellers and managers faced heavy margin calls, and it took them several weeks to get the green light from the Federal Housing Finance Agency tap into their liquidity cushions.
It’s a scenario that the big non-banks hope not to repeat.
“Point of [FHFA] asking them to have this liquidity makes them more resilient in a stressful environment. The whole point of building up cash is being able to use it,” said Ed DeMarco, president of the Housing Policy Councilwhich represents the major non-bank mortgage lenders and managers.
Industry stakeholders participated in a virtual forum on Monday afternoon to share their thoughts on the proposed changes to the criteria for Fannie Mae and Freddie Mac sellers and repairers, as well as a 2021 proposal by ginnie mae for its transmitters.
Attendees took it as a good sign that Ginnie Mae and the Federal Housing Finance Agency jointly organized the event. the Conference of State Banking Supervisors – which regulates non-banks at the state level – also participated in the session.
The FHFA proposed a series of changes for GSE sellers and repairers in February. As the custodian of government-sponsored businesses, the FHFA does not regulate mortgage lenders. Its proposed criteria for counterparties to Fannie Mae and Freddie Mac, however, would determine how they manage risk. Ginnie Mae released its own proposed guidelines for its issuers in July 2021, but has not implemented them.
The FHFA proposed an additional liquidity buffer for large nonbanks, which it said they could use “during times of financial or economic stress.” The Housing Policy Council asked the FHFA to clarify exactly when these buffers could be used and how they would be recapitalized after the stressful event ends.
“Large vendors/non-banking services should understand the procedures for accessing the liquidity buffer before a crisis, not during a crisis,” the Housing Policy Council wrote.
Emissaries from several industry trade groups also criticized an additional 200 basis point liquidity charge that the FHFA proposed on all advertised hedge positions. The FHFA said the new requirement was a response to margin calls it observed in March 2020.
Scott Olson, Executive Director of Community Home Loan Association, said the liquidity requirement was “improvised” and would penalize small sellers and repairers. In a letter to the FHFA, the CHLA said the requirement would hurt consumers by increasing concentration and making the market less competitive.
“Many small, creditworthy IMBs, faced with large increases in liquidity, will choose to simply sell their loans to aggregators rather than businesses,” the CHLA wrote, which could result in “less choice for consumers, less competition and fewer personalized services”.
Other commentators have argued that increases in liquidity could also cause originators to manage risk less effectively.
Urban Institute researchers Karan Kaul and Laurie Goodman, and former Ginnie Mae chairman Ted Tozer, in a joint letter, said the proposed new liquidity requirements appeared to be “punitive”. They argued that the additional liquidity burden would discourage hedging and could cause originators to use less effective hedging strategies.
“This is the opposite of what the FHFA wants,” Kaul, Goodman and Tozer wrote.
While the FHFA has proposed increased liquidity requirements for non-banks, committed lines of credit would not count towards fulfilling them. Committed lines of credit, which may include warehouse lines of credit, manager’s advance and mortgage servicing rights, are governed by covenants between the financial institution and the borrower. Unlike uncommitted lines of credit, they cannot be canceled without breaking the agreement.
If the FHFA does not allow these committed lines of credit to count to some extent for overall liquidity needs, “Either there will be a lot more warehousing of cash and cash equivalents, or the lines are going to be used rather than waiting.” DeMarco said.
In its comment letter, the trade group also highlighted that committed lines of credit performed well during the early 2020 disruptions.
Bob Broeksmit, President of the Mortgage Bankers Associationsaid it would be “problematic to eliminate the recognition of committed lines of credit”.
“They are durable in a way that uncommitted lines are not and can only be removed under certain conditions,” Broeksmit said.
A frequent criticism of the previous FHFA administration was its tendency to implement changes that the mortgage industry viewed as abrupt. Caps on investment properties the agency put in place with the US Treasury in 2021 caught many players in the mortgage industry off guard.
FHFA Acting Director Sandra Thompson has generally taken a more deliberative stance. But, contrary to this approach, the agency currently expects GSE sellers and repairers to implement the proposed changes to eligibility requirements within eight months.
This schedule did not earn the FHFA any points among industry stakeholders. The Housing Policy Council, as well as the Mortgage Bankers Association and the Urban Institute, also asked FHFA to delay implementing any changes for at least one year.
Currently, FHFA plans to implement the changes by December 2022.