Excess mortgage servicing securitizations return to market
Ally Financial (GJM) priced the securitization of excess servicing securitzations last week at $1.2 billion, the first signs of life in that market in one year. And Bank of America Merrill Lynch analysts expect more mortgage servicing rights to change hands on the structured finance playground. The securitization of excess servicing in mortgages are not a new concept. The government-sponsored enterprises require servicers to collect and retain a minimum servicing fee of 25 basis points and capitalize it as an MSR. Excess servicing is what's left of the interest payment after deducting the security's coupon, the guarantee fee, the 25 bps and any purchased mortgage insurance on the loan. Servicers can either capitalize the excess or sell it into a securitized pool, with the latter an example of the above deal. Before the crisis, excess servicing deals were commonplace. Between March 2006 and February 2008, there were more than $23.6 billion in excess servicing deals. But when the financial crisis struck, consolidation began. Larger institutions began taking over smaller mortgage companies, constricting dealflow. The overall problems in the secondary market led to dormant transactions of this type between March 2010 and last week. However, analysts say that could be changing. "The environment for doing excess servicing deals is favorable once again due to the recovery in the securitization market over the past two years, the outlook for long term rates, and the favorable environment for taking on prepayment risk due to tighter underwriting standards," BofAML analysts said. Upcoming Basel 3 requirements diminish the value of MSRs for banks, who will have to maintain more capital in order to carry these assets on their balance sheets. Specifically, the new rules allow the MSRs to be recognized only up to 10% of the common equity component of Tier 1 capital. Any MSRs over that amount will be deducted from capital. The Mortgage Bankers Association sent a letter to regulators in October, arguing that 56 banks already exceed the 10% limit. These requirements, BofAML analysts said should be an incentive for big banks to unload the excess servicing, especially if they are close to or above the 10% threshold. "We believe that this regulatory capital change and the favorable environment for doing excess servicing deals will result in an increase in securitization activity going forward," the analysts said. Write to Jon Prior. Follow him on Twitter @JonAPrior.