After a mortgage is made, mortgage servicers collect monthly payments from the borrower and pass them on to the investors. In a healthy market, servicing can be fairly routine.

But when many borrowers fall behind on payments, like in the current housing market, servicers play a critical role by helping them stay in their homes. That role is especially important for of Federal Housing Administration (FHA) and US Department of Veterans Affairs (VA) borrowers as serious delinquency remains elevated among FHA loans and rose among VA loans in the third quarter of 2026.

However, fulfilling this critical role is more difficult for servicers of FHA and VA loans, which are pooled into Ginnie Mae–guaranteed securities. FHA and VA loans serve a large share of first-time and low-income homebuyers, who may run a higher risk of default. Yet Ginnie Mae servicers must use their own funds to keep paying investors when borrowers fall behind, until the borrowers catch up or the loans are bought out of the securities.

Complicating the situation further, many servicers in this space are independent mortgage banks (IMBs)—companies that, unlike banks, focus solely on mortgages. Of the 10 largest Ginnie Mae issuers, 9 are IMBs, and nonbanks, mostly IMBs, serviced 83 percent of Ginnie Mae loans in 2024. This reliance on IMBs poses an additional challenge because, unlike banks, which have Federal Deposit Insurance Corporation–insured deposits and access to the Federal Reserve, IMBs lack a stable funding source in adverse market conditions, relying on business cash and short-term warehouse credit lines from banks instead.

Taken together, the Ginnie Mae investor payment requirement and IMBs’ lack of stable funding creates liquidity challenges that can intensify as FHA delinquencies trend upward.

In this article, we review how Ginnie Mae has addressed this risk by tightening capital requirements, updating liquidity standards, and giving IMBs capital credit for hedging their servicing business against interest rate swings. We then propose a next step: extending capital credit to hedges against mortgage defaults.

Why Ginnie Mae is concerned, and how it has responded

For most IMBs, the most valuable asset is their mortgage servicing rights (MSRs): the right to earn a fee for servicing loans. IMBs can also sell MSRs or use them as collateral to borrow. When an economic downturn causes more borrowers to fall behind on their payments, their loans can remain outstanding, but fees can take longer to collect and the loans cost more to service. That reduces what IMBs expect to earn from servicing and can lower the value of their MSRs. As a result, IMBs may be able to borrow less against those rights just when they need more cash to cover higher servicing costs and to keep paying investors.

If interest rates fall at the same time, refinancing can offset those losses by bringing in new business and cash. But if rates stay high, as in a period of stagflation, many IMBs could run short of cash.

Given these concerns, Ginnie Mae updated its financial requirements for IMBs in 2022, with changes phased in through 2024:

• Higher minimum net worth: Ginnie Mae raised its minimum net worth requirement. IMBs already needed to hold $2.5 million plus 0.35 percent of their outstanding Ginnie Mae single-family origination. Now, they must hold an additional 0.25 percent of their other single-family servicing, such as Fannie Mae and Freddie Mac loans.
• Updated liquidity standards: Since 2015, IMBs have had to hold liquid assets of $1 million or 0.10 percent of their Ginnie Mae servicing balance, whichever is greater. The 2022 update kept that amount the same but broadened what counts as liquid. Now, liquid assets include Fannie Mae and Freddie Mac securities and certain payments that servicers advance on behalf of delinquent borrowers, giving IMBs more flexibility in meeting the requirement.
• A new risk-based capital ratio requirement: This was the most significant and most debated change, and it took effect at the end of 2024. IMBs must now hold capital equal to at least 6 percent of their risk-weighted assets (i.e., assets weighted by how risky they are). MSRs are treated as especially risky, carrying a 250 percent risk weight, so each dollar held counts as $2.50 against the requirement. But MSRs worth more than the company’s net worth don’t count toward capital at all. The reasoning is that IMBs often pledge MSRs as collateral for their warehouse credit lines, yet MSRs are likely to lose value just when cash needs are greatest. That is why MSRs require more capital but count less toward the requirement.

Hedging can also reduce risk

Although holding more capital is one way to guard against losses, hedging—or buying a financial contract that gains value when a company’s main business loses value, much like insurance—can also reduce risk. In 2024, Ginnie Mae issued an All Participant Memorandum (APM), APM 24-12, which allows IMBs to count hedges against interest rate risk toward their risk-based capital requirement if they have a proven track record of hedging.

But interest rates are only one driver of MSR values. A 2016 Urban Institute report noted that MSR values depend “on both interest rate risk and default risk.” When rates are high and defaults are rising, interest rate hedges won’t protect IMBs’ liquidity.

A recent Federal Reserve study finds that defaults weigh heavily on MSR values. For Ginnie Mae loans, a 1 percentage-point increase in the annual rate of early payoffs, often from refinancing when rates fall, reduces MSR values by about 5 percent. But a 0.5 percentage-point increase in the annual default rate reduces MSR values by about 9 percent. Credit risk, in other words, matters as much as interest rates, if not more.

A new tool for hedging default risk

IMBs therefore need a way to hedge credit risk too. One option is credit derivatives: contracts whose value, and the cash they pay out, rise with mortgage defaults. Traditional credit default swaps, which pay out when a company or bond defaults, may help somewhat, but a contract tied directly to defaults on Ginnie Mae loans would be more effective. Its usefulness would need to be proven, but in theory, the tool would give IMBs a unique way to protect their MSRs from swings in credit performance.

The market is already moving in this direction. Vista Index Services and Intercontinental Exchange have developed MDX®, an index that tracks serious delinquencies on FHA and VA loans made in a given period. The index starts at 100 and rises with the share of loans that become 120 days delinquent or are modified. In effect, it tracks the economics of the IMB business.

Starting in October 2026, Wall Street firms have offered swaps on this index. An IMB would pay a fixed amount (2 percent of the loan balance covered) and receive payments that grow as delinquencies and modifications rise. When defaults climb, the IMB’s cash and the swap’s value increase, offsetting MSR losses.

To see how this could work, consider, for example, a hedge on Ginnie Mae loans made in 2007, just before the financial crisis. A seven-year swap covering $100 million of mortgages would have paid out $25 million. With MSRs typically worth about 2.5 percent of the loan balance, that payout would have protected the servicing value on $1 billion of mortgages, even if the MSRs had become worthless.

Implications for Ginnie Mae

Ginnie Mae broke new ground by letting interest rate hedges reduce capital requirements. The same logic applies to credit risk. Now that mortgage credit derivatives exist, Ginnie Mae could give IMBs capital credit for using them, if the hedges prove effective under standards like those in APM 24-12. Because Ginnie Mae’s requirements, though binding on all issuers, are guidance rather than formal regulation, a new APM could make this change immediately.

Ginnie Mae is not a financial regulator and has limited resources, so it must be strategic in supporting a strong IMB industry. Encouraging risk reduction matters as much as raising capital requirements, whose costs ultimately show up in higher mortgage rates. If credit hedging costs less than holding more capital, homeowners could benefit from lower rates without weakening IMBs.