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 Basel III bank capital rule currently being phased-in increases the risk-weighting of MSRs held by banks from 100 percent to 250 percent.
  • It also decreases the cap on MSRs a bank may hold on its balance sheet to an unduly stringent 10 percent limit; MSR assets above the limit must be deducted dollar-for-dollar 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, above which 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, despite any actual evidence that the underlying risk warrants such punitive treatment.
  • On November 12, 2014 MBA joined the American Bankers Association and the Independent Community Bankers of America on a joint letter in opposition to the harsh treatment of MSRs under Basel III. The letter recommended that the United States bank regulators reject the Basel III limits on MSRs-MSR capital treatment should continue under the current capital framework without imposing a 10 percent cap or a 250 percent risk-weighting under Basel III.
  • On February 23, 2015 MBA received a response from the U.S. bank regulators, stating that they believe the Basel III rule's treatment of MSRs is appropriate and strengthens the quality of the required level of capital.
  • On March 25, 2015 MBA took the issue directly to the Basel Committee itself in a comment letter on a consultative document on capital minimums.

Impact:

  • In significant part due to the new Basel rules, many banks are aggressively shedding MSR assets, moving them to banks with smaller MSR exposures and to non-bank servicers.
  • Some of these transfers are driven by Basel-related issues, not necessarily by the core competencies of the parties involved. As a result, many banks that are strong servicers and want to remain in the business are 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 (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 aggregate 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 continues to urge U.S. bank regulators to reduce the risk-weighting back to 100 percent, increase the 10 percent cap, and exclude MSRs from the 15 percent cap.
  • MBA has engaged with the Trump administration to increase their awareness of the issues created by Basel III and its disproportionate impact on an asset that is unique to the American mortgage system. MBA has urged the administration to revise the treatment of MSRs as part of its ongoing regulatory review under the Executive Order on Core Principles for Financial Regulation.  
  • MBA continues to support proposed Congressional legislation that would require bank regulators to conduct a study on the impact on community banks from the capital treatment of MSRs.

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