WASHINGTON - Lenders are urging regulators to quit capping the amount of mortgage servicing rights that can count toward capital.
In August, the regulators - the Federal Deposit Insurance Corp., Federal Reserve Board, Office of the Comptroller of the Currency, and Office of Thrift Supervision - issued an interim rule allowing banks and thrifts to include the mortgage servicing rights they originate in regulatory capital.
Previously, only mortgage servicing rights purchased from other originators could be counted as capital.
But in making the change - spurred by a long-awaited decision of the Financial Accounting Standards Board - the agencies opted to retain limits on the amount of capital that can come from an institution's servicing portfolio.
Mortgage servicing rights and purchased credit card relationships together can't count for more than 50% of regulatory capital. In addition, when calculating Tier 1 regulatory capital, mortgage servicing rights are valued at the lesser of 90% of market value or 100% of book value.
In comment letters sent to the agencies, lenders argued that while these restrictions once made sense, the market for servicing rights is now mature enough that they aren't needed.
"Servicing rights should be included in capital because the assets have measurable value and independent existence from the institution, can be sold quickly in the event of liquidation, provide significant fee income, and can be managed to protect against prepayment risk," wrote Joe K. Pickett, president of the Mortgage Bankers Association of America.
Mr. Pickett, who is also chief executive officer of BancBoston Mortgage Corp., and others argued that the agencies should simply factor the risks posed by servicing rights in their overall interest-rate risk calculations - especially since losses in the value of servicing rights are often offset by simultaneous gains in the value of other assets. Servicing rights lose value when interest rates go down and borrowers pay off their mortgages early.
"The risk profile of an institution is better assessed when considering the composition, pricing, and risk characteristics of all assets and liabilities," wrote Marti Sworobuk, a lobbyist for America's CommunityBankers, the thrift trade group.
While the 90%-of-market-value restriction on servicing rights affects all institutions that own them, the 50%-of-capital limit hits only a few banks and thrifts. But several of these complained to regulators that the 50% rule will force them to sell off some of the servicing rights they originate.
This could lower profits, wrote Russell Cummins, senior vice president for loan administration of Charter Bank, an Albuquerque, N.M., thrift. "Servicing rights provide stability to our income during business cycles of high interest rates and they act as a natural hedge to many of our longer term fixed rate assets," he wrote.
The lone dissenting voice among all these calls for counting servicing rights as capital came from Independent Bankers Association of America president Richard L. Mount.
"This additional capital will be derived from an estimate of future cash flows that is both unpredictable and unenforceable in cases of nonpayment and foreclosure," Mr. Mount wrote. "Strong capital is critical to ensure the safety and soundness of the banking system."