As we explained in a client alert back in 2023, pursuant to APMs 22-09 and 22-11, Ginnie Mae will require all of its single family MBS Issuers to maintain a risk-based capital ratio (RBCR) of 6%, in addition to adhering to net worth and liquidity requirements. The requirements discussed in our 2023 client alert go into effect on December 31, 2024. Ginnie Mae is unique in requiring a RBCR because Fannie Mae and Freddie Mac do not impose a risk-based capital requirement on their servicers.

Because mortgage servicing rights (MSRs) make up a significant portion of a Ginnie Mae Issuer’s assets, Ginnie Mae has issued APM 24-12, which offers Issuers relief from the RBCR requirement if the Issuer can demonstrate successful hedging over time. These changes are designed to provide Issuers greater flexibility in managing the risk-based capital requirements under the minimum financial requirements for Issuers of Ginnie Mae MBS. Below are the key details and implications for market participants.

Key Elements of APM 24-12

• Issuers that hedge and would like relief must submit their “MSR Value Adjustment” and the resulting RBCR with their annual audited financial statements.
• Quarters in which an Issuer did not hedge before December 31, 2024, will not be counted in average hedging performance.
• Issuers must hedge their MSRs in at least 4 of the most recent 12 quarters and in at least 1 of the most recent 4 quarters.
• Hedging results from affiliates will be included up until June 30, 2025. Thereafter, only hedging at the approved Issuer will count.
• For any Issuer approved to participate in Ginnie Mae’s program for the first time on or after December 31, 2024, Ginnie Mae, in its sole discretion, may consider hedging results for periods prior to the Issuer’s approval that meet the minimum requirements above.

Hedging Efficacy

Gross MSRs have a risk weighting of 250%, but the value of the Gross MSRs can be adjusted based on the hedging efficacy table set forth in the Ginnie Mae MBS Guide (Guide). “Hedging Efficacy” is calculated each quarter and is the proportion of gains (or losses) on derivatives used to hedge MSRs relative to the changes in MSR value due to market and model changes. The MSR value adjustment is then averaged over the prior 12 quarters (excluding quarters in (or prior to) 2024 in which there was no hedging). The MSR value adjustment is determined in accordance with a table set out in the Guide. The MSR value adjustment can be as high as 50% if the Hedging Efficacy is between 80% and 120%.

Hedging Programs

In sum, Ginnie Mae Issuers stand to benefit from establishing a hedging program related to their MSRs, if they do not have one already. If you have any questions about starting a hedging program or need help starting a hedging program, please reach out to a member of our team.