Preparing for the GNMA Risk Based Capital Ratio (RBCR)

June 28, 2024

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:

  • Cash and cash equivalents – 0%
  • GNMA loan eligible for repurchase – 0%
  • Reverse mortgage held for investment – 0%
  • Government and Conforming loans held for sale – 20%
  • All other loans held for sale – 50%
  • Mortgage servicing rights – 250% (the 250% is applied to the lessor of total MSRs or adjusted net worth)
  • Unacceptable assets used to calculate adjusted net worth – 0%

I have prepared a case study using over 75 lenders of all sizes and noted the following consistencies.

  • In most instances, there was no significant adverse impact when calculating the RBCR ratio compared to the original capital ratio.
  • Companies with MSR lines of credit or other operating lines of credit (non-warehouse) tend to have lower RBCR.
  • The RBCR ratio in most cases have cases have declined since 2021. I want to mention this because if you calculated your RBCR 2 years ago, you should re-visit it if the company’s net worth has declined since 2021.

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.

Paul Chiarelli

About the Author

Paul Chiarelli is an Audit Partner at ACS and serves various industries such as; mortgage banking, private lending, private equity, debt collection services, manufacturing, distribution, and asset-based lenders. His services include financial statement audits, internal control analysis, subservicing oversight, quality of earnings, LEAP Filings, etc. Paul began his professional career with Amper, Politizner, and Mattia (currently EisnerAmper) in the commercial audit practice. With EisnerAmper, Paul worked in various industries including; distribution and manufacturing, pharmaceuticals, insurance, PEO’s, and REITs. At EisnerAmper Paul assisted in SEC filing and registration statements. Paul has been asked to speak at numerous Mortgage Banking Conferences including the MBA Accounting & Finance Conference. Paul is a newly appointed board member of the Mortgage Bankers Association of New Jersey.

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