By now you’ve heard the news and read the stories (some of which we published) about the coming Basel III rules and how they could force a wholesale restructuring of the residential servicing business.
At issue is the cash or “real value” of mortgage servicing rights and how much they can count toward Tier I capital at a depository institution.
Currently, a lender/servicer can have all its capital tied up in MSRs, though I’ve yet to find a bank of any size that suffers from this unique condition. Basel III, as suggested, caps MSRs at 10% of capital, but provides a seven-year phase-in that reaches well into 2018.
By now, you can see where I’m headed with this. If a cap is placed on MSRs and capital, it should — in theory — make the asset less valuable, forcing certain banks to unload receivables, maybe at a loss.
But keep in mind this one central thought: even though the rules have been published and discussed, they are not cast in stone.
Changes are still possible.
Let’s take a look at the nation’s five largest servicers, all of which (you guessed it) are banks.
Two of the three — Wells Fargo and Ally Financial — are north of the 10% MSR threshold.
Ally — which hopes to go public this year — is at a sky-high 35% while Wells is at 18%.
(Investors in Ally’s IPO may be none too thrilled with this specific news.) The other three — Bank of America, Citigroup and JPMorgan Chase — are all in the “safe zone” of 10% or less.
(Tier I Capital/MSR figures courtesy of Credit Suisse.)
But just because Ally and Wells are currently north of the 10% cap that doesn’t mean they will necessarily sell MSRs.
After all, they have until the year 2018 to get there, and a lot will happen to the mortgage business between now and that future time.
In other words, those anticipating that the Basel III rules will hammer MSR values could be mistaken.
Tom Piercy, managing member of Interactive Mortgage Advisors, Denver, points out there is “a lot of maneuvering going on right now,” noting that banks with the largest MSR exposure are lobbying their regulators and the end result is far from predictable.
He and others who make their living from evaluating and selling MSRs feel that once Fannie Mae and Freddie Mac restructure their servicing compensation contracts, MSRs may be just as valuable in the future as they are today.
“There’s too much white noise out there right now,” he said, adding that servicing packages continue to trade.
“We’re still seeing niche buy orders,” he added.
Still, there is a palatable amount of fear among owners of MSRs.
After all, who wants to own something that in a few years might be worth less?
A recent report on Basel III and MSRs penned by analysts at Credit Suisse estimates that $12 billion of mortgage servicing rights “market value” could change hands over the short term as commercial banks whittle down their holdings to get closer to the 10% level.
The $12 billion number doesn’t represent servicing rights, but the cash value of those contracts.
Depending how these mortgage servicing rights are “marked” on the books of the sellers, certain banks may profit, while others suffer. But there is one bright spot for sellers.
At press time, rates were on the rise once gain, and as any mortgage banker worth his salt can attest: when rights rise, so do the value of the underlying mortgage servicing rights.