A reduction in mortgage servicing fees by the GSEs would be a "meaningful positive" for the industry, according to analysts with KBW's Keefe Bruyette & Woods.

In a note issued Wednesday in reaction to an American Banker story that reported that the GSEs are considering such a move, the analysts wrote that gain-on-sale revenues booked when originators sell mortgages are set by the market and should encompass the true cost of servicing. A lower servicing fee would not change overall gain-on-sale revenues, but simply reduce the amount of mortgage servicing rights booked and increase cash gains.

Thus, originators would be allowed to "hold and fund smaller MSRs," volatile intangible assets that can account for no more than 10% of Tier 1 common equity under Basel III. A reduction would "be a significant positive from a capital perspective."

The conclusion assumes that the current standard GSE servicing fee of a quarter of 1% of principal balances exceeds the actual costs of servicing, and the KBW analysts wrote that "if an originator did not like a lower servicing fee and wanted more servicing revenue, it could simply retain more excess servicing and replicate the position it had before servicing fees were reduced."

As a window on the possible impact of a cut, the KBW analysts cited a reduction in the servicing fee for adjustable-rate mortgages by Fannie Mae in 2006 that they believe had "no impact on gain-on-sale margins of that product."

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