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56 URBAN INSTITUTE: GSEs SHOULD CONSIDER RAISING NONBANK SERVICER CAPITAL REQUIREMENTS Banks have retreated somewhat from mortgage servicing in the last six years because they have been the focus of post-crisis financial reforms, even though both banks and nonbanks were underregulated and undercapitalized before the crisis. e retreat of banks from mortgage servicing has allowed nonbank institutions have regained their market share in the mortgage servicing space that they lost in the aftermath of the crisis; that share was historically 30 percent, but shrank to 6 percent in 2010 as banks became more involved in mortgage servicing. Nonbank servicers face unique risks that banks do not; their failure is borne by borrowers, government agencies, and taxpayers, which is why the government should raise capital requirements for nonbank servicers to reduce risk to these entities and pass more of it on to the industry, according to a commentary titled "Nonbank Regulation Remains Unfinished Business from the Housing Crisis" by Karan Kaul and Laurie Goodman of the Urban Institute. Fannie Mae, Freddie Mac, and Ginnie Mae have all recently increased capital requirements for nonbank servicers, but it's not enough, according to Kaul and Goodman in a brief on Friday titled "Nonbank Servicer Regulation: New Capital and Liquidity Requirements Don't Offer Enough Loss Protection." e requirements may be sufficient for a low-risk and stable interest rate environment, but may not be if interest rates become volatile or if defaults rise, according to Kaul and Goodman. Among the unique risks nonbank servicers face are, according to the authors: Heavy exposure to mortgage servicing rights (MSRs), which is a "highly volatile asset class." According to analysis from Urban Institute, less than one percent of total assets in banks are comprised of MSRs; for nonbanks, that percentage rises to between 10 and 35 percent for nonbanks. MSRs are a hard-to-value asset not actively traded in an open liquid market. Pricing is model dependent and prone to assumptions, therefore creating additional price volatility. If delinquencies rise rapidly, the requirement to remit payment to investors can cause significant liquidity crunch e authors expressed concern of the recent new minimum capital and liquidity requirements issued by the GSEs and Ginnie Mae, namely: the requirements are not risk-based and are left up to the judgment of management; existing regulation relies on ongoing monitoring to detect problems, and while the authors said they support this, financial stress can often set in quickly, which leaves little or no time for remedial action; and when regulators transfer MSRs from an insolvent servicer to a financially stable servicer, they often do so in a panic, thus maximizing the proceeds and finding a buyer quickly often take priority over quality. "Perhaps most importantly, if there is not enough buyer interest in acquiring a for-sale servicing portfolio, or bid prices are low, Ginnie Mae and the GSEs may have to pay the new servicer to pick up the loans, putting taxpayers at risk," the authors wrote. With taxpayers on the hook to bear the losses when nonbank servicers fail, the authors contend that more regulation is needed, namely raising capital requirements for nonbank servicers. "We urge the GSEs and Ginnie Mae to revisit this topic to strike a healthier balance between nonbank capital requirements and ensuring a well-functioning industry that works for borrowers, investors and taxpayers, in both good times and bad," Kaul and Goodman wrote. ANALYSIS SHOWS WHY TENANT RETENTION IS IMPORTANT Managers of properties in single-family rental (SFR) securitizations have been steadily increasing rents more for renewals than for new tenants for vacant properties over the past two years, a new report by Morningstar Credit Ratings found. According to Morningstar's 28-month-long analysis of single-family rental securitizations, rents in Q 4 of 2015 dropped for new tenants (after almost half a year of remaining flat), while at the same time rents for existing tenants has increased gradually and steadily since at least July of 2014. While both categories show increases since the summer of 2014, renewals rents have tended to go up by a steady 3 to 4 percent, while vacant property rents were a little less consistent. A graph shows that more than 80 percent of renewal properties showed increased rents at the end of January, compared to 60 percent of vacant properties hoping to lure a tenant. In July, both types of properties were about even at just under 80 percent, according to the report. Length of vacancy is a big factor in allowing property managers to increase rental rates. e longer a property remains vacant, the more likely a property manager is to shift the focus from optimizing the rent to simply getting the property occupied, the report found. erefore, where tenants are in place, it's easier to ask for more money. "One of the most basic, but important, concepts in single-family rentals is simply to keep properties occupied and, as a result, cash flowing," the report stated. "It is in the interest of single-family rental securitizations for property managers to keep properties occupied by maintaining high renewal rates." ere also appears to be some seasonality to the rental increases. Larger increases in renewal properties occur more often in fall months and larger vacant-to-occupied increases happen more in summertime. According to Morningstar, school systems have a lot to do with this seasonality. Property managers stress the importance that tenants place on their preferred school districts, and that new tenants are willing to absorb higher rental rates in the summer in order to be settled in time for the new school year. Meanwhile, renewal tenants will pay higher rental rates in the fall to meet their desire to stay in a chosen school district, the report found. "One of the most basic, but important, concepts in single- family rentals is simply to keep properties occupied and, as a result, cash flowing,"

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