The trend of U.S. banks shifting their subprime mortgage servicing rights to non-bank, specialist servicers looks set to continue, according to a Fitch Ratings report.

New capital requirements make it much less attractive for lenders to keep servicing rights on their books. ASR first reported on this growing trend in March.

“The decision by many banks to reduce or exit subprime and distressed mortgage servicing in part reflects regulatory risks faced by these institutions in the migration to Basel III, where the maximum value of MSRs a bank can count toward Tier I capital is effectively 10%,” explained Fitch.  

Fitch said that this year alone, banks have shifted more than $500 billion of these holdings.

Ocwen Financial's acquisition of MSRs from OneWest Bank earlier this month for $2.5 billion is the latest example of moves, particularly by smaller banks, to divest whole servicing portfolios.

Walter Investment Management and NationStar, two other large servicing specialists, have also completed sizable portfolio acquisitions in recent months.

But growth opportunities in subprime mortgage servicing rights aquisitions for nonbank servicers are likely to be only temporary. Over the longer term  the pace of acquisitions is likely to be constrained by the lack of new subprime originations since 2007.  

Fitch is concerned that on a go forward basis larger subprime servicing specialists will be driven toward increased origination activity and it could create some balance sheet risk for these servicers.

In particular, the ratings agency highlights nonbank mortgage servicers with significant private equity ownership, “whose investment strategies typically seek to achieve cost efficiencies through increased scale and/or capitalize on slowing mortgage refinancing in a rising rate environment.”

“Private equity involvement raises questions about the firms' investment horizons and capital extraction plans with respect to owned mortgage servicers,” said the Fitch report.





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