The re-proposal of U.S. banking regulators' framework to comply with Basel III capital standards offers several benefits broadly impacting the securitization markets. And alongside reviving banks' interest in providing mortgage servicing, it could bolster the private-label, residential mortgage-backed securities (RMBS) market.
In its comment letter submitted before the June 18 deadline, the Structured Finance Association (SFA) applauded the retention of the current p-factor--used to calculate risk-weighted assets—rather than the original proposal's elevated one that would have "unnecessarily" increased capital requirements.
These refinements are important because even highly technical capital rules can have real effects on market liquidity ...
It also noted the proposed reduction of the risk-weighted floor to 15% from 20% for securitizations (although not resecuritizations), and the "look through" approach to assess the risk weights of senior securitization exposures.
"The revised proposal reflects meaningful progress, including on several issues that are critical to the securitization market," said Michael Bright, CEO of the SFA in a statement.
The SFA did, however, recommend several changes to the treatment of sponsor-provided guarantees and other limited recourse features, the proposed 100% risk-weight floor for senior resecuritizations, and certain parameters to avoid operational burdens.
"These refinements are important because even highly technical capital rules can have real effects on market liquidity, bank participation, and the availability and cost of credit for consumers and businesses.," said David Dwyer, general counsel, policy and regulatory affairs at the SFA.
A return to servicing
The re-proposal could also encourage banks to return to mortgage servicing and more generally strengthen the RMBS) market.
Banks were major providers of mortgage servicing prior to the Great Financial Crisis and largely relinquished the business to non-depository financial institutions when new rules made it less feasible from a capital perspective.
"The current risk-based capital framework applied to depository institutions has contributed to a significant shift in mortgage origination and servicing activity away from regulated banks and toward non-depository institutions over the last 13 years," said Patrick Sullivan, executive vice president of the Mortgage Partnership Finance Program in its recently filed comment letter.
Under the revised Basel III proposal, the risk weighting for mortgage servicing assets (MSAs) plummets to 250% from the current approach that effectively imposes a 1,250% risk weight, dramatically reducing capital requirements.
By re-establishing mortgage servicing and offering loan origination and servicing together, in-house, banks may be able to increase their jumbo and other nonconforming loan businesses and subsequent securitizations, said Monsur Hussain, head of markets research at Fitch Ratings.
The extras
Other RMBS-friendly components of the re-proposal include replacing the currently static and flat 50% risk weight for residential mortgages with lower loan-to-value bands as principal is amortized over time. And lowering the securitization risk-weight floor to 15% from 20% reduces banks' capital burden to retain the senior tranches of their own RMBS, making it more cost effective to retain those assets on their balance sheets.
"In concert, we think these are positive for RMBS private-label issuance in the medium term," Hussain said.
