New FHFA rules won't change nonbank servicers unprofitability

by MPA04 Feb 2015
The Federal Housing Finance Agency's (FHFA) proposed rules for minimum capital and liquidity requirements for nonbank mortgage servicers will have little effect on the industry, according to Fitch Ratings. 

The rating agency went on to say the new requirements are not a panacea for eliminating the risk exposure typically facing whole-mortgage and RMBS holders under a servicer failure or a disruption in the servicing of mortgage assets and that nonbank mortgage servicers will still remain unprofitable in 2015. 

"The business remains mostly monoline, cyclical, short-term wholesale funded, thinly profitable and subject to operational and regulatory risks," reported Johann Juan, director of Financial Institutions, Roelof Slump managing director of RMBS and Matthew Noll, CFA, senior director of Financial Institutions with Fitch Wire. "These characteristics limit the Issuer Default Ratings of mortgage servicers to below investment-grade levels."

Fitch added that it does not view the capital and liquidity requirements as materially reducing the risk of default for mortgage servicers under stress.

While the new rules could help expand credit, they could also prove to be more challenging for smaller servicers and may be a modest entry barrier for new players. The FHFA's proposed financial requirements for nonbank mortgage servicers include a minimum net worth of $2.5 million plus 25 bps of the unpaid principal balance (UPB) of serviced mortgages; minimum capital ratio of greater than or equal to 6%, calculated as tangible net worth, divided by total assets; and minimum liquidity of 3.5 bps of total agency servicing plus an additional 200 bps of total nonperforming loans in excess of 6% of total agency UPB.

According to Fitch, the proposal follows similar minimums introduced by Fannie Mae and Ginnie Mae for approved servicers earlier this year. The new FHFA requirements are slated to finalize in second quarter of 2015 and take effect six months later.

For the largest nonbank mortgage servicer based on UPB, Ocwen Financial Corp., the FHFA proposal would translate into minimum net worth, capital and liquidity requirements of $1.0 billion, 6% and $896.5 million, respectively, levels that the company would comfortably satisfy. Other large, nonbank mortgage servicers, such as Nationstar Mortgage and Walter Investment Management, are also expected to meet FHFA's proposed minimum guidelines.

Smaller nonbank mortgage servicers may be incrementally challenged to meet the capital and liquidity requirements, but Fitch said it does not believe the minimums are sufficiently high so as to require material capital to be raised or drive increased industry consolidation.

The requirements may serve as a competitive advantage to larger players, adding to the importance of scale in what is already a thin-margin business. Historically, nonbank mortgage servicers have not been subject to regulatory capital requirements, in contrast to banks, which have clear and rigorous capital standards, according to Fitch.



Is TILA-RESPA a good or bad thing long term?