Bank Regulators Issue Study on Basel III Impact on MSR Market
On June 30, four federal agencies issued their Report to the Congress on the Effect of Capital Rules on Mortgage Servicing Assets.
The Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and National Credit Union Association issued the report (http://www.federalreserve.gov/publications/other-reports/files/effect-capital-rules-mortgage-servicing-assets-201606.pdf) to discuss risks to firms holding mortgage servicing rights, the role played by MSRs in bank failures, regulatory approaches to MSRs, the evolution of the market for MSRs since 1998, the potential impact of the revised capital rule on the mortgage servicing business and the potential impact of the revised capital rule on non-banks.
The study issued the following conclusions:
–MSR valuations are inherently subjective and subject to uncertainty. –MSRs were a factor contributing to the failure of four insured depositories during the recent credit cycle.
–Only 17 percent of banks own MSRs, and nonbank servicers gained significant market share since 2011.
–Small banks have increased their share of MSR ownership in recent years.
–The effects of stronger bank capital requirements and mortgage reforms may make the residential market and its bank lenders more resilient and a recurrence of crisis-era problems less likely.
–The capital requirements that apply to banks would not necessarily be appropriate for nonbank servicers.
–The bank regulators do not recommend any additional statutory or regulatory actions at this time.
Jim Gross, MBA vice president of financial accounting and public policy, cautioned while the study provided insight on how bank regulators consider MSR assets, it left to question how those regulators re-calibrated the limit on MSRs to just 10 percent of tier 1 capital for all banks from the previous 100 percent for savings and loan associations and 50 percent for commercial banks. “It also begs greater clarification as to why risk-weighting not deducted from capital was reset to 250 percent from 100 percent,” he said.
MBA members with questions about the report may contact Gross at jgross@mba.org or at 202 557-2860.
