Basel III could shift the landscape for banks holding mortgage servicing rights if proposed capital ratio guidelines take effect ‘as is’, bank analysts say.
The Mortgage Bankers Association tackled concerns about MSRs in a letter to the Federal Reserve and other regulators this week.
The issues highlighted have banking analysts raising red flags. They claim how MSRs are defined when calculating a firm’s Tier 1 capital ratio under new Basel rules could cause an MSR sell-off among banks.
For starters, under the proposals, the value of mortgage servicing rights can only be used to account for up to 10% of common equity when determining a bank’s Tier 1 capital requirements.
When dealing with financial firms that have a combination of MSRs, significant investments and deferred tax assets, the lender has to deduct the amount by which the aggregate of those three items exceeds 15% of the firm’s common equity component of Tier 1, the MBA said.
“Presently, MSRs are limited to 50% of Tier I capital for banks and 100% for savings and loans, and there is no limitation on the combined total of the three asset classes,” MBA said in a letter to regulators. “Thus, if a bank is at, above or approaching either the 10% or 15% thresholds, it would either stop producing or buying new servicing assets or price the underlying loans to take into account the deduction from capital.”
Sarah Hu, an analyst from Royal Bank of Scotland (RBS), explained that “basically under Basel III, the maximum amount of MSR value that you can count towards your tier 1 capital ratio is 10%.”
“As a result, holding higher MSR (value) is becoming more expensive for servicers,” she added.
Hu is already seeing larger banks minimize their exposure. In a June report, RBS said $350 billion in servicing has been moved from banks to non-banks in just the past two years as banks begin to hedge on Basel III capitalization risks.
“Most of the big lenders are starting to reduce their MSRs’ size, except for Wells Fargo (WFC),” Hu said.
RBS noted in a recent report that Fortress Investment Group’s Nationstar bought $63 billion of servicing rights from Aurora Bank and another $10 billion in MSRs from Bank of America (BAC).
The MBA warned in its letter to regulators Wednesday that changes to how MSRs are treated under Basel III also could leave American banks uncompetitive when compared to European institutions.
“Targeting MSRs creates disparity between U.S. banks and foreign banks as the latter have few if any mortgage servicing rights,” the MBA wrote.
“There is already a 10% haircut on MSRs in the U.S. regulatory capital rules. This coupled with the proposed 10% and 15% limits will put U.S. banks on an unlevel playing field compared with their foreign competitors.”
