Basel III Treatment of Mortgage Servicing Assets

The punitive treatment of mortgage servicing rights (MSRs) under the Basel III risk-based capital standards threatens to undermine the value of this important asset, with adverse implications for the entire mortgage finance chain.  Performance, capacity and service should be the primary drivers of who gets market share in servicing, not excessively high capital standards on one segment of the industry. 

Overview:

  • The new Basel III rule increases the risk-weighting of MSRs held by banks from 100 percent to 250 percent. 
  • It also decreases the cap on MSRs that a bank may hold on its balance sheet from a 50 percent common equity component of tier one capital to a more stringent 10 percent limit; MSR assets above the limit must be deducted from regulatory capital. 
  • In addition, MSRs, deferred tax assets and equity interests in unconsolidated financial entities are limited, in aggregate, to a 15 percent common equity component of tier one capital before they must be deducted from regulatory capital.
  • The unnecessarily punitive treatment of MSRs makes them one of the most costly asset classes in the entire Basel III framework.

Impact:

  • In significant part due to the new Basel rules, banks of all sizes have sold MSR assets at a record pace, moving these assets to banks with smaller MSR exposures and to non-bank servicers.
  • Many of these transfers were driven by Basel-related issues, not necessarily by the core competencies of the parties involved. As a result, many banks that are good at servicing and want to remain in the business have been forced to dramatically increase capital levels or shed the asset.
  • With the transfer of servicing out of a bank, the bank is losing one of its two primary relationships with retail customers (i.e., deposit and mortgage loan relationship), a safe and sound earning asset, and a natural hedge to the loan production side of the business.
  • The punitive capital treatment, on balance, reduces demand for MSRs, creating a less liquid market that could result in lower prices for mortgages sold in the secondary market, and higher rates for consumers. 

MBA's Position/Next Steps:

  • MBA believes that bank regulators should reevaluate the risks associated with owning MSR assets and change the risk-weighting back to 100 percent, increase the 10 percent cap, and exclude MSRs from the 15 percent cap.
  • H.R. 2029 - the Consolidated Appropriations Act, 2016 - contains an MBA-supported provision directing the federal banking agencies to conduct a study of the appropriate capital requirements for mortgage servicing assets for banking institutions. Additionally, the impact of imposing the Basel III standards for these assets on those institutions' abilities to compete in the mortgage servicing business will also be studied. MBA will assess the study's findings once it is finalized; a report is due within 180 days of H.R. 2029's enactment, which took place on December 18, 2015 .

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