New GSE Servicing Rules May Hurt Smaller Nonbank Firms

WASHINGTON — New servicing standards issued by the government-sponsored enterprises are unlikely to pose a hurdle for the biggest nonbank players in the market, but small servicers could find it more challenging.

Two of the biggest nonbank servicers, Nationstar Mortgage Holdings and Walter Investment Management Co., already meet or exceed the new capital and liquidity requirements issued last week.

But the rules' impact could be felt more among smaller nonbank servicers.

"We believe the rules established are more meant to impact small, nonpublic, nondepository institutions that have operated on the periphery in the sector," said a report by FBR Capital Markets issued May 21.

The Mortgage Bankers Association agrees that a few nonbank seller/servicers could have problems in meeting the new standards that go into effect Dec. 31.

"Our assessment is the immediate impact on existing servicers is relatively modest," said Pete Mills, a senior vice president at the MBA. "They didn't set the standard so high that a lot of servicers aren't going to make it. But we've got to make sure that servicers can continue to grow."

The trade group said there are flaws with the new standards.

Under the new rule, all GSE seller/servicers, including banks, must meet a minimum net worth requirement of $2.5 million, plus 25 basis points of the unpaid principal balance on one- to four- family loans serviced. Nonbank GSE servicers also have to meet new minimum capital and liquidity requirements.

The marginal capital requirement of 25 basis points is "pretty steep," Mills said in an interview. "The concern over the long run is that it becomes a barrier to a servicer's ability to grow. It might inhibit a servicer's ability to retain servicing."

Mills also said that the servicing liquidity standards don't distinguish between actual/actual servicing and scheduled servicing.

GSE servicers that issue mortgage-backed securities are responsible for remitting interest and principal payments on a scheduled monthly basis whether the homeowner pays on time or not. That is referred to as scheduled servicing.

Many small servicers typically sell their loans via the Fannie Mae and Freddie Mac cash windows. They are obligated to pay the homeowner association dues, property taxes and insurance, but not principal and interest payments. This arrangement is referred to as actual/actual servicing.

"It doesn't make sense for scheduled servicing and actual/actual servicing to have the same liquidity standards when the liquidity demands are quite different," Mills said. "That is something that needs continuing work."

The rule would require nonbank servicers to have a tangible net worth to total assets of at least 6% to meet the minimum capital requirement. For liquidity, they must retain 3.5 basis points on total agency servicing unpaid principal balance, including Ginnie Mae servicing. Nonbank servicers also have to hold 2% against nonperforming loans greater than 6% of their portfolio.

Mills said that servicers have a six-month window to meet the capital and liquidity standards but Fannie and Freddie have the discretion to extend the deadline.

The GSEs can extend the Dec. 31 deadline for "companies that make good progress at meeting the standard, but come up a little short," Mills said.