Business

Non-Bank Mortgage Servicers Not Constrained By FHFA Liquidity Rules

The FHFA’s new non-bank liquidity rules probably won’t interfere with any existing businesses, though it does have implications for mortgage servicing M&A activity

The Federal Housing Finance Agency has released proposed financial requirements for non-bank mortgage servicers that want to keep working with Fannie Mae, Freddie Mac, and Ginnie Mae, and while they won’t be finalized until next quarter it sounds like mortgage servicers don’t have anything to worry about.

“If measured at the consolidated level, all but one of the independent servicers/originators is well within existing guidelines. If measured at the servicer level, Walter (WAC) will be in compliance with these guidelines as well,” write Sterne Agee analysts Henry J. Coffey, Jr., Jason P. Weaver and Calvin Hotrum.

Sterne Agee Mortgage Servicers test FHFA

Mortgage servicers: FHFA will finalize rules next quarter

The proposed rules are a minimum net worth of $2.5 million plus 2.5 basis points of the unpaid principal balance of all loans serviced by the company; a minimum capital ratio of 6%; and a minimum liquidity ratio of 3.5 bp of total Agency servicing (Fannie Mae, Freddie Mac, and Ginnie Mae) plus an additional 200 bp of non-performing Agency servicing above a 6% threshold. The rules will be finalized next quarter and then non-banks servicers will have six months to get into compliance if they aren’t already.

The FHFA announcement is careful to point out that these aren’t technically regulations, but a servicer that doesn’t comply could get locked out of Agency business. The FHFA says that banks (depository institutions) should keep following their own regulatory minimums, which are generally stricter anyways.

FHFA likely to test finances at the servicer level

As the Sterne Agee report explains, most independent mortgage servicers are already within bounds, and while it’s not 100% clear it seems like Walter Investment Management is as well. The Sterne Agee report points out that in the FAQ the FHFA talks about “the legal entity that is contractually obligated to the Enterprises” and exceptions that might exist with parent company support. Investors will push for a more explicit answer, but it sounds like the quarterly tests will be done at the servicer level.

While that would mean all existing independent mortgage servicers are good to go, it does create a small hurdle for deals in the mortgage servicing space since any M&A proposal would have to prove that it meets FHFA requirements post-merger.

“Translation: deals get financed with equity issuance– 25 bps x acquired UPB,” write Coffey, Weaver, and Hotrum.