Industry
As we all know, GNMA has introduced a new risk-based capital requirement for mortgage lenders, which is set to take effect on December 31, 2024. This regulation is designed to ensure that issuers have sufficient capital to withstand financial stress and market environments.
The new risk-based capital requirement emerges from a recognition that the existing capital framework, which predominantly focuses on net worth and liquidity, may not sufficiently capture the diverse risks faced by issuers. By introducing a more nuanced and risk-sensitive approach, GNMA aims to enhance the resilience of the mortgage finance system against economic downturns and other financial shocks.
Under the requirement, GNMA issuers must maintain a minimum risk-based capital ratio, calculated by dividing the issuer's adjusted net worth by its risk-weighted assets. This ratio ensures that issuers hold adequate capital relative to the risks associated with their assets. Different asset classes will be assigned specific risk weights reflecting their inherent risk levels. Below are some of the key areas risk weights:
I have prepared a case study using over 75 lenders of all sizes and noted the following consistencies.
I would strongly suggest that as the implementation date approaches, lenders must monitor this ratio and compute it quarterly to ensure compliance.
Furthermore, Issuers should conduct regular stress tests and scenario analyses to assess their capital adequacy under the new requirement. These exercises will help identify potential issues and be proactive to any forecasted violation as opposed to reactive. I have provided a PowerPoint of a presentation that I have completed for multiple organizations, regarding the GNMA and FHFA changes, that you mind find helpful. In this presentation was also a refresher or the changes that took place in 2023. I would also recommend speaking with your audit firm to go over the calculation, if you feel that you will be close on meeting this new requirement.