Today, U.S. Rep. Ed Perlmutter (CO-07) passed bipartisan legislation requiring federal banking regulators to jointly study the appropriate capital treatment of Mortgage Servicing Rights (MSRs) under Basel III and the NCUA Risk-Based capital requirements.
Under H.R. 1408, the Mortgage Servicing Asset Capital Requirements Act of 2015, regulators will have six months to study and report back to Congress on many outstanding questions about the mortgage servicing industry including how the assets performed during the financial crisis; the ability to establish a value and liquidity for MSAs; and the ability of regulated banks to service mortgages they originate.
“This study will be an important step in informing how to proceed in establishing the appropriate capital treatment of MSRs going forward,” said Rep. Perlmutter. “It is important to understand if non-bank mortgage servicers have the capacity or expertise to manage defaults or modifications in case of another sudden market disruption or economic downturn.”
Since the financial crisis of 2008, there has been a shift in the mortgage servicing industry and a significant sale of MSRs from banks to non-banks including to specialty servicers, private equity firms, and hedge funds. In 2013, about $1.03 trillion of mortgage-servicing rights were sold, with the vast majority going to non-bank servicing companies. The Financial Stability Oversight Council (FSOC) Annual Report of 2014 specifically named the transfer of mortgage servicing rights to non-banks as a “potential emerging threat.”
“While there are several factors for the growth in non-bank servicing activity, I believe the primary driver has been the capital treatment of MSAs under the Basel III accords. Basel III was always intended to apply to the largest most interconnected globally active banks, but the MSA capital treatment is actually having the greatest impact on community banks,” continued Perlmutter.
The language in H.R. 1408 is nearly identical to Section 116 of S. 1484 offered by Chairman Shelby in the Senate Banking Committee.