Will Basel III affect your mortgage banking model?
If you are a depository, Basel III is coming. But this will affect non-depositories, as well. Here are some thoughts from "around the water cooler."
There is always a debate over selling mortgages servicing released versus service-retained. Get cash now or focus on customer relationships? Who you're selling to, the underlying economics, the SRP, your business model- all are factors that will affect your decision. A depository with a large wealth management business that does relatively few mortgages may prefer to retain servicing, using the mortgage as a service to its high net worth clients and to attract others. An aggressive mortgage lender wanting to be hyper- competitive on rates and on originator compensation may opt for servicing-released.
Well- Basel 3 adds one more factor into this decision.
Basel 3 in General
Basel 3 is a new set of regulatory capital standards recommended by a global committee with no actual authority over U.S. lenders. However, Basel 3 standards have been adopted by U.S. regulators for depository institutions (FDIC, OCC). Non-depositories are not directly affected by Basel 3, and credit unions are affected differently by something the NCUA calls "Basel lite" (beyond our scope today).
Why do we have Basel 3? After all- Basel 2 has only been in place since January 2007! Basel 3 is the G-20's response to the mortgage crisis and economic meltdown and a statement to the world that banks are not "too big too fail":
The G-20's main aim on [Basel 3] banking reform is to ensure that governments never again have to bail out the banking sector. . . . [T]he G-20 is absolutely clear that bank dependency on taxpayer support on the scale witnessed over the last three years is unacceptable and must not be repeated." - A Practitioner's Guide to Basel III and Beyond, Richard Barfield, Thomson Reuters (2011).
The FDIC rule is available here and takes effect January 1, 2015.
Basel 3's Effect on Selling Mortgages
A major part of Basel 3, which affects our business, has to do with mortgage servicing assets or rights (MSA or MSR) and how MSR counts towards capital requirements.
Old Rule
MSR allowed to count 100% towards common equity tier 1 capital
New Basel 3 Rule
MSR cannot exceed 10% of common equity tier 1 capital
Plain English = This will effectively cause a significant increase in the capital requirements for many banks. In fact, the FDIC estimated that 74 lenders under $500 million currently do not have sufficient capital because of this rule (and that's only counting FDIC-regulated entities under $500 million in assets).
5 Facts/Consequences
This affects banks of all sizes-big and small--unlike other parts of Basel 3, there is no exception for smaller lenders with the new treatment of MSR
This will not affect portfolio lenders--the MSR is not treated as a separate asset if both the loan and servicing are kept in-house
This will not affect lenders who already sell servicing- released--you know what always counts towards tier 1 capital? Cash.
This will primarily affect lenders that sell a lot of loans but retain servicing, e.g. Fannie/Freddie sellers who keep servicing for customer relationship management
More banks will sell servicing-released and we will see major sales of MSR by big banks to non-depositories-- this has already started, and is expected to continue. The majority of servicing rights in the U.S. are concentrated in a tiny number of companies. For example, Ocwen's MSR portfolio increased from $155 billion to $455 billion in 2012-13!
Conflicting Policy Objectives/Unintended Consequences
The effect of this Basel 3 rule is ironic. The U.S. Congress released its response to the 2008 crisis in the form of the CFPB, the Dodd-Frank Act, and ultimately an array of new rules. Among the rules are the new Federal servicing regulations, which specifically make an exception for "small servicers," on the theory that it is better for small community banks to service mortgages for borrowers. More accessible, more accountable, and more trustworthy, the Dodd-Frank Act/CFPB would prefer that more small lenders service mortgage loans.
Ironically, the effect of Basel 3 is the opposite- Basel 3 discourages small lenders from retaining servicing and drives mortgage servicing into the hands of a few major national servicers, who are less accountable to borrowers and regulators, and the source of many of the problems that got us here in the first place.
Other news/thoughts/trivia:
The US Supreme Court will hear a case on whether LOs need to be paid overtime (whether it will actually reach that issue is unclear). Do you pay your LOs overtime or salary? Where we currently stand is the DOL's 2006 opinion letter (even though it says "withdrawn", remember that it was put back in place after a federal court overturned the DOL's 2010 opinion letter that changed position and essentially said LOs are not exempt from overtime laws- yikes!) New York is investigating "blacklists" of people barred from bank accounts allegedly due to minor violations (overdrawing, failure to pay fees) for potential civil rights problems
Do you have a moral compass? Does it mesh perfectly with societal expectations? Holding the world record for broken bones (433), and with a history of police chases and bank robbing, Evel Knievel's moral compass apparently did not mesh--but it does appear he had one. As bad as he acted, he (reportedly) used his fame to steer kids away from drugs and to stay in school. In 1977, he broke the arm of his former promoter who claimed Evel took drugs and abused his wife and children (going against the values that Evel tried to impress on America's youth).
"Your main job in this world is to be your best self."
- Rosalene Glickman, Ph.D.
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