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Non-Bank Capital Ratios Better Than at Banks

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A ratings agency report highlights how some of the larger non-bank lenders and servicers have better capital ratios than big banks — though that’s not necessarily a good comparison. The report recommends that regulators need to shift their focus.

Non-bank mortgage firms tend to have more capital and lower leverage ratios than do their large commercial bank counterparts.

The disparity reflects the variety of sources — including the Federal Reserve discount window, Federal Home Loan Bank System and short-term money markets — that are available to banks but unavailable to non-banks.

The findings were discussed by Kroll Bond Rating Agency in its report, How Much Capital Does a Non-Bank Mortgage Company Need?.

For instance, Ocwen has a tangible-common-equity-to-total-asset ratio of 17.9 percent, while PHH has a 17.62 percent ratio and Nationstar’s ratio is 9.21 percent.

But at Wells Fargo — which is the biggest mortgage originator and servicer in the country — the ratio is just 8.43 percent.

The ratio falls to 7.07 percent at Bank of America and 6.35 percent at JPMorgan. Citigroup’s ratio is 8.60 percent.

However, at 5.76 percent — Walter’s ratios was lower than the banks and non-banks listed.

Looking at the firms from a leverage standpoint, the debt-to-tangible-common-equity ratio is just 1.38 percent at PHH and 2.37 percent Ocwen. Nationstar is higher at 6.28 percent, as is Walter at 6.87 percent.

But at the banks, the leverage ratios jump to 9.21 percent at Citi and rise as high as 12.97 percent at Chase. Wells Fargo and BofA fall in the middle range of the four banks.

However, Kroll said that the comparison of bank and non-bank ratios is unreasonable.

“Pursuant to the 2010 Dodd Frank law, U.S. regulators are in the process of creating a working resolution regime for large banks so that their potential failure does not lead to a systemic crisis,” the report said. “However, KBRA believes that for the foreseeable future, federal insured depositories and their uninsured depositors will benefit from some degree of extraordinary systemic support. The fact that the FDIC, when acting as a receiver of a bank and/or bank holding company, can pay creditors at its discretion creates the expectation of governmental support.”

The ratings agency recommended that reasonable financial, operational and disclosure requirements for non-banks would benefit investors, consumers and the government sponsored enterprises.

“Close attention need be paid to areas of risk that require adequate capital and profitability, such as lending and mortgage securitization, as opposed to areas that are more concerned with operational efficiency and compliance, such as loan servicing,” the report said.

But Kroll acknowledged that servicer capital levels are important and highlighted how the only Ginnie Mae issuers to default did so because they ran out of cash.

While servicers of Fannie and Freddie loans can fund liquidity needs through commercial banks, Kroll explained that Ginnie servicers need to find capital internally.

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