The Basel III endgame proposal's full benefit related to the capital treatment of servicing rights is not yet clear, but the promise of it is enough for independent mortgage banks to begin running the numbers and what they're finding could reshape how the industry is structured.
"Normally when an IMB gets either acquired or acquires a bank I call it the inverted pyramid because the way the capital stack is with the MSR assets, it's way overweighted on the top," said Tom Piercy, president at Rocktop Capital Advisors. "If that goes away, the capital stack could become a solid pyramid foundation."
Such comments suggest that if the benefits of bank capital rule relief for mortgage assets are compelling enough, the rule revision may impact nonbanks more than depositories. Other recent policy measures, such as regulatory efforts to definitively preempt state interest-on-escrow rules
"Rather than getting more banks into mortgage banking, I think what's going to happen is you are going to have mortgage bankers becoming banks," Piercy said.
Uncertainty around the capital rule's outcome makes it unlikely a nondepository would commit to a bank charter at this point, but many see it as enough of a potential game-changer to analyze now, said Ted Tozer, the former president of Ginnie Mae.
What the industry is watching
In addition to an exemption from an existing cap on how much MSRs count toward the highest tier of bank capital, the plan calls for exploring whether and how much their risk weighting should be lowered from 250%, with the Mortgage Bankers Association asking for far less.
"MBA will be recommending that the risk weight for MSRs return to 100%," President and CEO Bob Broeksmit said during the group's secondary and capital markets conference in New York this week.
There is "an intellectual case for it to be lower," said Isaac Boltansky, managing director and public policy at Pennymac while speaking during a separate panel on the Basel proposal at the conference.
MSRs are in the most illiquid asset category (level 3) due to the degree to which they lack standard market pricing and rely on subjective valuations but while the ability to manage their risk through modeling and hedging isn't perfect, it has improved over time, Boltansky said.
When it comes to proposed rules for warehouse lending, Broeksmit expressed some disappointment that standard banks get only 5 percentage point reduction from the current risk weighting of 100%.
Warehouse lending's risk weighting should be far lower, according to Broeksmit.
"Under the current system warehouse lines carry a 100% risk weight, but that defies logic. If an IMB fails to repay, a bank gets the whole loan, but at only a 50% risk weight. Are you kidding me? The risk weight shouldn't improve when a counterparty fails," Broeksmit said.
Part of the challenge in getting policymakers to approve significant capital rule reductions for warehouse lines or private mortgage insurance is explaining how these could reduce taxpayers' housing costs. Interest in exploring bank charters at the conference suggests it's significant.
"PMI or warehouse lending, yes, that's mortgage related; but it doesn't jump out at consumers," Boltansky said.
