Preserving the Value of Mortgage Servicing Rights
The ability to trade mortgage servicing rights (MSRs) in a deep and liquid market is a critical driver of both the cost and availability of credit. Regulatory actions that impose punitive capital standards or impair the liquidity-directly or indirectly-of MSRs undermine the value of this important asset and will ultimately harm consumers. It is imperative that policymakers take a measured and balanced approach to regulation of mortgage servicing to avoid unintended adverse consequences.
- The right to service a mortgage is an important revenue driver in mortgage banking and serves as a natural hedge to cyclical mortgage production income. For many independent mortgage bankers (IMBs), MSRs are a key asset on their balance sheet and help ensure that servicing IMBs have "skin in the game." For banks and credit unions, the servicing provides an important consumer relationship and source of revenue.
- Moreover, the ability to sell MSRs to a third party in a competitive market is also a critical part of the mortgage value chain.
- Over the past few years, there has been a significant shift in servicing market share from banks to non-banks. Depository institutions have been selling their MSRs in part due to new banking regulations-such as the Basel III bank capital requirements, the National Mortgage Settlement, and the regulatory requirements of the Dodd-Frank Act.
- The large MSR transfers in the past few years have consisted primarily of legacy, high-touch, distressed loans to servicers that focus on working with that borrower population.
- The spike in MSR transfers to non-banks is raising concerns with some state regulators and lawmakers about the capacity of some servicers to provide uninterrupted consumer service and to fund advances to investors. This scrutiny includes potential concerns about the financial stability and business models of non-bank servicers.
- In response to these perceived concerns-in addition to issues identified with servicing transfers generally-there has been increased regulatory attention around servicing transfers.
- Unduly preventing servicing transfers or imposing requirements that make it difficult for them to occur will have a significant, negative impact on the availability and cost of mortgage credit.
- Certain market forces are driving the transfer of servicing rights and these transactions must be efficient in order for credit to flow unencumbered.
- Importantly, mortgage servicers, servicing activities, and servicing transfers are already well-regulated:
- Fannie Mae, Freddie Mac and Ginnie Mae have significant counterparty requirements for servicers and exercise robust oversight of their servicers' capital, liquidity and operations-including their ability to effectively conduct loan modifications and loss mitigation for borrowers.
- The Consumer Financial Protection Bureau (CFPB) recently implemented expansive new servicing rules governing monthly statements, payment posting, escrow accounts, and detailed requirements for working with delinquent borrowers on loan modifications and loss mitigation options.
- The CFPB also enforces federal rules on servicing transfers and recently issued detailed regulatory guidance for servicing transfers that require servicers to ensure that consumers are treated fairly by both the transferee and transferor of servicing.
- Increased, duplicative compliance costs or the imposition of unrealistic capital requirements will increase the cost of servicing, eventually resulting in more expensive credit for consumers.
MBA's Position / Next Steps:
- State and federal policymakers should give proper weight to the importance of ensuring that residential mortgage servicing remains an economically viable activity and that MSRs remain an attractive asset class in a deep, liquid and competitive market.
- Before enacting any additional regulation, policymakers should carefully analyze the existing regulatory infrastructure to determine where gaps exist and then coordinate appropriate responses among all stakeholders.
- MBA will work with Ginnie Mae, the Conference of State Bank Supervisors (CSBS), and other stakeholders to ensure that regulation of independent mortgage servicers is appropriately tailored and does not unduly penalize certain business models.
- MBA will continue to work with policymakers to ensure that servicing transfers are not unduly encumbered or discriminated against due to the business model of the receiving servicer.
- Congress should remind regulators that actions that impose punitive capital standards or impair the liquidity of MSRs undermine the value of this important asset and will ultimately harm consumers.
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