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Vaultedge Newsletter - Will Ginnie Mae MSRs become 'the weak link' ?

Vaultedge Newsletter - Will Ginnie Mae MSRs become 'the weak link' ?
By Sanat from Vaultedge • Issue #62 • View online
On one hand, lenders are reeling under low production volumes due to high interest rates. On the other hand, secondary market is thriving with robust deal activities - as banks & non banks sell off large chunk of their MSR portfolio.
Nearly $12Bn of bulk MSR offerings, are up for bids. Interestingly, Ginnie Mae MSRs form a significant chunk of this loan pool.
The question is, what’s driving this trend ? Are we witnessing an exodus from Ginnie Mae MSRs?
While a high interest rate environment is causing MSR valuation to go up, Ginnie Mae portfolio pose a conundrum.
Firstly, vast majority of these MSRs are produced & serviced by small non-banks. As of September end, non bank lenders had a portfolio of $1.77 trillion Ginnie Mae MSRs.
This confounds non-banks with a unique challenge.
As holders of Ginnie Mae MSRs, they are responsible for assuring that timely payments are made to bondholders. Even when the underlying loans go unpaid due to delinquencies, those servicers still must cover bondholders’ payments. Given the forecast of high interest rates & unemployment trends in 2023, MBA predicts delinquencies & defaults to only go up in the coming months.
This puts huge payment risks on non-banks.
Furthermore, Ginnie Mae’s new capital regulation mandates MSR holders to maintain a risk weighted capital adequacy by end of 2023. This is going to push up operational costs & regulatory burden for non-banks, who are already struggling under pressures of low production volume.
For now, non-banks are hedging their risks by rationalizing their MSR portfolio & selling part of their Ginnie Mae assets.
Going forward, it would be interesting to watch - on how non bank lenders with Ginnie Mae heavy portfolio, navigate a high delinquency & capital intensive market environment in 2023.
Will Ginnie MSR portfolios prove to be a ‘weak link’ for non-bank balance sheets in 2023 ?

Weekly Roundup
Mortgage advisory firms' $12B offerings add fuel to a hot MSR market
The MSR sector continues to shine, but there is a looming concern of GNMA MSRs
Ginnie Mae nonbank capital rule effective from 31st Dec 2024
"Delinquency rate likely to increase in upcoming quarters" - MBA Newslink
Spotlight: What's new at Vaultedge
While MSR market is abuzz with deal activities, we are also keeping a watch on potential increase in delinquencies & defaults in 2023. To help us better understand the outlook for default servicing in the upcoming year - we spoke to Michael Merritt on this week’s episode of Mortgage Vault Podcast.
Mike is Senior Vice President, Customer Care and Default Mortgage Servicing at BOK Financial. He’s an expert in default servicing with 10+ years of experience across Mr. Cooper, Goldman Sachs & BOK Financial.
Mike talks about the current “high interest rate” macro environment, how it’s expected to shape default rates in 2023 and what servicers can do, to prepare for it. 
He also shares how artificial intelligence & ML is critical to keep loan files clean & well indexed. This helps customer agents retrieve the right data in the first instance and provide a smooth servicing experience even during a default surge.
Listen to the full episode below
Did you enjoy this issue?
Sanat from Vaultedge

We write about the future of mortgages, real estate and automation.

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