(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Agnes T. Crane
NEW YORK, March 18 (Reuters Breakingviews) - A regulatory
loophole on mortgage servicing should be a no-no. Basel III
should, once fully implemented, prevent any one U.S. bank from
being too dominant at managing the nuts and bolts of home loans.
It will impose a punitive charge if more than 10 percent of a
bank's capital is dedicated to supporting the business. But
there's a way for lenders to get mortgage servicing rights off
the balance sheet yet keep the income. That risks adding more
confusion to a complex part of the market.
MSRs are a quirk of U.S. mortgage finance. They’re an
estimate of a bank's future revenue from processing payments of
home loans. They can also be a handy fillip to a bank's earnings
as they're worth more when rates rise, offsetting a potential
drop in mortgage lending. But the crisis laid bare conflicts of
interest and poor business practices. The top five players
recently paid a $25 billion fine.
Bank of America (BAC.N), Citi (C.N) and JPMorgan (JPM.N)
have been reducing their market share in the MSR market. Wells
Fargo (WFC.N), though, has held steady. As of the end of 2012
its MSRs were already running up against the Basel III capital
cap. Breaching the limit would mean having to hold capital of
1,250 percent against the excess.
That's why its executives have flirted with the idea of
selling some MSRs and then leasing back the day-to-day business.
It has been done before by servicing specialist Ocwen Financial
(OCN.N), which is not subject to bank capital rules. Wells'
finance chief Tim Sloan recently said the bank's in no hurry to
do anything. But it would not necessarily just have to win more
business to tip over the limit: an increase in interest rates
would push up the MSR value and the amount of capital needed.
The problem with such transactions is that they push the
owners of the MSRs one step further away from borrowers. That
can create even more confusion about who is legally and
financially responsible for the assets, which would make any
future large-scale mortgage defaults even harder to resolve.
Moreover, buyers may be non-banks, which would push the assets
into the less regulated shadow banking system.
It may be that Wells and whoever might buy the MSRs could
devise enough checks and balances to make it work. But if
there's no clear benefit to borrowers, regulators should find a
way to stop it.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Wells Fargo Chief Financial Officer Tim Sloan said on
March 5 that the bank isn’t in any hurry to sell its mortgage
servicing rights. “We’ve got an adequate level of capital,” he
said during an investor conference.
- Wells serviced $1.9 trillion of mortgages in the fourth
quarter, making it the largest mortgage servicer in the country,
according to RBS. The bank valued its mortgage servicing rights
at $11.5 billion at the end of last year. The capital required
to run that business equates to 10 percent of the bank's Tier 1
common equity under Basel III.
- Basel III is expected to cap a bank’s mortgage servicing
rights at 10 percent of Tier 1 common equity. If that limit is
breached, the excess valuation will be assessed a charge of
1,250 percent against capital.
All mucked up [ID:nL1E8K17JM]
Runaway leader [ID:nL2E8IC3GW]
- For previous columns by the author, Reuters customers can
click on [CRANE/]
(Editing by Antony Currie and Martin Langfield)
Keywords: BREAKINGVIEWS USA/MORTGAGES
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