Important Changes to HUD Net Worth Requirements and Proposed Changes to GNMA Capital and Liquidity Requirements

As Carl kindly put it when we proposed this topic, he plans to watch paint dry instead of reading this in any detail! But heading into year end and audit season, lenders need to plan for this important issue.

HUD Net Worth Calculations

This summer, HUD’s Office of Inspector General released an updated version of Chapter 7 of the HUD Audit Guide and a Mortgage Letter outlining significant changes to unacceptable assets. These changes apply to all approved FHA lenders and any lenders applying for FHA approval, the most significant of which include:

  1. Any real property, including all land and any buildings attached to it, is considered an unacceptable asset unless the real property is the home office registered with HUD. This includes real estate owned, buildings, investment properties, land, and building improvements.
  2. Any assets that are included in “other assets” on the balance sheet are excluded from the Company’s net worth calculation unless a schedule of other assets is included in the audited financial statements.
  3. Any assets designated to offset future expenses are now considered unacceptable assets. This includes prepaid assets, deferred tax assets, and capitalized expenses.

HUD requires all FHA approved lenders to comply by December 31, 2021, while the changes are effective immediately for lenders applying for FHA approval.

According to the Mortgagee Letter, lenders who are impacted by the changes to FHA’s Unacceptable Assets (i.e.: dropping below minimum net worth requirements) must submit a Notice of Material Event in LEAP within 30 business days of the deficiency and a Corrective Action Plan documenting the planned actions to be taken by the lender to ensure compliance by December 31, 2021.

Proposed GNMA Changes

Additionally, this summer Ginnie Mae (GNMA) released proposed changes to their capital and liquidity requirements. These are only proposed changes and have not yet been approved or enacted. The most significant of those changes are as follows:

  1. Net Worth: The GNMA net worth calculation does not address obligations from sources other than GNMA. GNMA has proposed to add 25bps of the Company’s current GSE portfolio.
  2. Liquidity: The current GNMA requirement does not address liquidity demands from sources other than GNMA obligations and does not address interest rate risk of loans in the pipeline. The proposed changes would add 5bps of the Company’s GSE outstanding obligations and 20bps of total loans held for sale.
  3. Risk Based Capital Ratio: GNMA currently has no risk-based capital requirements; this proposal would add a Risk Based Capital Ratio minimum requirement of 10%. The ratio would be defined as net worth, as defined by GNMA, adjusted for Excess MSRs divided by total Risk Based Assets.

The full release from GNMA can be found here:

https://www.ginniemae.gov/newsroom/publications/Documents/Financial%20Requirements%20RFI_v2.pdf

Dustin Pfluger is a mortgage banking partner with CWDL, a national CPA firm serving clients throughout the country. We provide mortgage industry-specific audit, accounting, tax, and consulting solutions that help you better understand the present so you can plan for future. Our forward-thinking insights have the power to transform the way you operate, and the training and education we provide empower your team to do more. Even amidst volatile markets and seismic industry shifts, we’re here with the guidance you need to see beyond today and make confident decisions about tomorrow. At CWDL, we help you see what’s possible.

For more information or questions on this or other mortgage banking accounting topics, please contact Dustin at dpfluger@cwdl.com.

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