Pulte's GSEs Prepare Capital Increase for Nonbank Mortgage Lenders

November 24, 2025 | A very safe and happy Thanksgiving holiday to all of the readers of The Institutional Risk Analyst. Our new weekly collaboration with Julia LaRoche has been a great success.  And we have a lot of mail from viewers, which we will be addressing each Friday on “The Wrap with Chris Whalen.” 

In this issue, we ponder the increasingly difficult circumstances facing Federal Housing Finance Agency Director Bill Pulte, who reportedly is the target of a federal grand jury probe. And below we look at the latest stealth capital increase for nonbank issuers in the conventional loan market coming from the GSEs with the apparent blessing of Bill Pulte's FHFA.

Readers may recall that Director Pulte publicly attacked us on X a month ago for suggesting during an interview on Bloomberg Radio with Tom Keene that he was preparing to increase net worth requirements on independent mortgage banks (IMBs).  And, as discussed below, we were right. 

In fact, the staff of the GSEs began to notify issuers this past summer that IMBs would be required to subtract parent company debt from the capital of the licensed seller/servicer if the latter had provided a guaranty on the obligations of the former. Now why, you may ask, would the operating unit of an IMB issue a guaranty on the senior debt of the parent? 

The use of a guaranty for parent debt of IMBs was first employed a decade ago to get a better credit rating on high-yield debt and thereby a cheaper cost of capital on the borrowing. But does the fact that the licensed seller/servicer inside of an IMB has issued a guaranty of performance on parent company debt matter to the GSEs? Nope. These guaranty provisions of many nonbank debt deals were mostly decorative and served as a means to get more support from institutional investors. Today the mortgage industry has established such a strong position in the bond market that most issuers do not even need to employ such affectations.

In fact, IMBs have been using similar structures going back a decade to the first bond transactions by PennyMac (PFSI) to finance mortgage servicing rights (MSRs) The issuance of unsecured term debt diversified IMB capital structures away from fickle bank warehouse financing and greatly enhanced the stability of nonbank issuers and the conventional market. The fact of a performance guarantee by a licensed seller/servicer for parent company obligations has no effect on the solvency of the issuer, but the risk managers at Fannie Mae and Freddie Mac do not seem to appreciate this little nuance. 

If the debt obligations of the parent company were unsatisfied, would the operating company inside an IMB make the payment and thereby reduce its net worth? Nope. But ignoring this reality, the risk managers at the GSEs decided to mimic federal bank regulators and impose onerous new capital requirements on IMBs. Even though issuing term debt has been a huge credit positive for nonbank issuers (and the GSEs as well), Fannie Mae and Freddie Mac wanted to flex their bureaucratic muscles.

But here is the big question: Did FHFA Director Bill Pulte even know or understand any of this last month he went after us in front of tens of thousands of people on X? Probably not. The GSEs had indicated that “guidance” on the new capital rules for IMBs would be forthcoming in December, but once word of this unwelcome initiative reached the Trump White House, the proposal was apparently dropped.

We ran financial and corporate ratings at Kroll Bond Ratings a few years back, and wrote a number of research pieces about nonbank mortgage issuers, so we have some idea about such matters. But why did the GSEs even think about making this change? Because the staffs of both of the enterprises, says one senior insider, felt that the industry was getting their way too often on using complex financing structures, transactions that the staff of the enterprises often do not fully understand. 

The provisions of most bank warehouse lines, for example, are far more stringent than the terms of the bond indentures in question. But the discriminatory treatment against IMBs by the staff of the GSEs evidences a more serious pathology, one that suggests to The IRA that the enterprises will never leave federal conservatorship. Ponder the question of whether Fannie Mae and Freddie Mac should retain mortgage exposures to help force down loan coupon rates, as we discussed recently in our column in National Mortgage News.

Should the GSEs Buy Mortgage Debt to Help Affordability?

Hedge fund mogul Bill Ackman, founder and CEO of Pershing Square Capital Management, recently proposed a plan for releasing the GSEs from conservatorship that delays an immediate IPO, instead favoring a three-step process to fulfill goals while keeping the conservatorship in place. But the biggest obstacle to releasing the GSEs from government control is the bureaucratic mindset of the personnel who run both enterprises.  

For example, a number of trade associations in Washington – including the Community Home Lenders of America and the Independent Community Bankers of America, proposed that Fannie Mae and Freddie Mac buy conventional mortgage-backed securities (MBS) to help the mortgage market. But aside from the obvious limitations to such a policy, it is unclear whether either GSE could actually acquire and manage larger portfolios. 

Would it help lower mortgage interest rates if Fannie Mae and Freddie Mac started to repurchase their own mortgage-backed securities (MBS) as well as the debt guaranteed by Ginnie Mae, in order to force mortgage interest rates down? The answer is no. Whereas the Federal Reserve Board does not hedge its purchases of Treasury debt and MBS for the SOMA, the GSEs would be required to hedge their portfolios, negating any benefit from the purchases. The chart below shows the percentage change in mortgage spreads c/o FRED.

Loan coupons have risen steadily since Halloween, even as Treasury yields have fallen, but can the GSEs force mortgage rates lower? Nope. For every additional dollar of MBS and/or whole loans purchased for the portfolio, the GSEs would need to sell an equivalent amount in the forward market to hedge the price risk. Sad to say, the net impact of the GSEs buying MBS on residential mortgage rates would be zero. 

The bigger question, however, is whether either enterprise could actually handle such a task operationally after spending 16 years in federal conservatorship. “The GSEs have not significantly reinvested in the infrastructure it would take to sell debt and hedge the portfolios on a larger scale,” notes one senior Washington observer. “It would take time and effort to rebuild that capacity, and given the extent of change in the executive ranks at both enterprises, it would take away focus from their other day-to-day priorities.”

GSEs Seek Ban on Excess Servicing Transactions

While the GSEs may not have the wherewithal to hedge interest rate exposures, they certainly are able to impose new restrictions on the mortgage industry. Indeed, in the past several weeks a new capital proposal has emerged from the GSEs, say several IMBs with direct knowledge of the matter. Again, this proposal makes no sense in terms of the stability of IMBs or the credit risk to the GSEs, but such arguments do not seem to impress the officials of either enterprise.

The risk managers inside of Fannie Mae and Freddie Mac have decided that the capital contributions to IMBs from large institutional investors for excess servicing strip (ESS) transactions should not be counted toward the net worth for conventional issuers. An excess servicing strip transaction is the sale of a portion of mortgage servicing fees that are above the base amount considered necessary as reasonable compensation for the servicer's work and, more important, to support loss mitigation. Some of the largest issuers in the industry use ESS transactions to finance the purchase of MSRs. This is a stable source of equity capital to IMBs that is at least as effective as long-term debt and arguably more advantageous to the GSEs in terms of reducing counterparty risk.

As with the earlier capital proposal, the details of this latest capital increase on IMBs are sketchy and nothing has been made available to the public or the trades. In many cases, the IMBs effected will be forced to raise additional capital to support the calculations for minimum net worth for conventional issuers – 25bp for conventional exposures and 35bp for Ginnie Mae vs the unpaid principal balance (UPB) of the loan – even though the institutional investors who participate in ESS transactions are often fully at risk by supporting purchases of MSRs.

As with the abortive proposal to require IMBs to subtract parent company debt from the net worth of the licensed entity, the proposal to disallow ESS investments in the calculation of the minimum equity of IMBs by institutional investors is a short-sighted initiative that reveals a breathtaking lack of understanding of basic finance. Not only are investors in ESS fully exposed to events of default, but the cash equity capital contributed to the IMB is fully committed and cannot be withdrawn. 

Keep in mind that when an institutional investor "participates" in an MSR strategy via an ESS transaction, they have no enforceable claim on the servicing asset. In most cases, the equity capital provided to the IMBs by large institutional investors who participate in ESS trades is actually in first loss position, providing both the GSEs and the equity holders of the IMBs with considerable protection. But such considerations seem to be unimportant in Washington, where housing policy and the financial realities of the residential mortgage market exist on different planets. 

Does the Trump White House understand that the professional staff of the GSEs are preparing to roll out yet another capital increase for the residential housing market in 2025? Does Director Pulte understand that the changes being advanced by the respective staffs of the GSEs are being made in his name and with his apparent blessing? We suspect that the answer is no.

In the past couple of months, Bill Pulte has advanced a number of ideas to help consumers with affordability, but this proposal to effectively ban ESS trades will increase the cost of mortgage credit to consumers. The proposal could also destabilize several large issuers in the process. It’s fine to talk about helping the housing market, but these latest changes being proposed by the GSEs for nonbank mortgage lenders are decidedly counter-productive and could increase the cost of mortgage credit to consumers. Happy Thanksgiving.  

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