Specialty subprime servicers stand to benefit as more U.S. banks offload mortgage servicing rights to avoid Basel III capital requirements on MSRs, analysts with Fitch Ratings claim in a new report.
Banks sold more than $500 billion in MSRs (unpaid principal balance) to nonbank-specialty servicers in the past year, Fitch data shows.
The takeaway from Fitch’s report: expect more of this, not less.
"The decision by many banks to reduce or exit subprime and distressed mortgage servicing in part reflects regulatory risks faced by these institutions in the migration to Basel III, where the maximum value of MSRs a bank can count toward Tier I capital is effectively 10%," wrote Fitch analysts Diane Pendley, Bill Warlick and Johann Juan.
"As a consequence, banks approaching the thresholds will likely reduce their servicing assets to take into account the deduction from capital."
As these MSR opportunities become available, nonbank servicers are likely to pick up the slack, growing their servicing portfolios. But with fewer subprime loans originated after 2007, the pipeline is expected to eventually recede.
When that happens, larger subprime servicers may focus on originations to ride out the housing recovery, Fitch suggested.
Still, bulk MSR transfers remain a risk.
The Consumer Financial Protection Bureau is watching bulk transfers closely to ensure accurate boarding and compliance.
"In high stress, low probability scenarios used to analyze the ratings of high investment-grade structured finance bonds, a potential large portfolio transfer of servicing may have negative rating implications for these bonds," Fitch noted.