Kurt Johnson, chief financial officer of nondepository lender and servicer Mr. Cooper, joked about the unlikelihood of presence on the bank-capital proposal panel at the Mortgage Bankers Association's annual conference in Philadelphia Monday.
But he also said there could be serious implications of the rule for nonbanks if it moves forward in its current form, particularly those that have financing lines secured by mortgage servicing rights.
"When these capital requirements come down, it's not just the banks that are going to be affected," Johnson said.
Not only could warehouse lines of credit be impacted by the U.S. version of international Basel rules, and financing secured by mortgage servicing rights may be too, he said.
Some banks have found mortgage servicing rights attractive as investments and collateral; they've demonstrated their value as a natural hedge that offsets declines in mortgage lending to consumers when rates rise.
But servicing rights also have a relatively high risk-weighting because they're considered subject to market risks that could make them difficult to liquidate through a sale under certain conditions, and the capital proposal is likely to magnify that concern.
"We've really been active in purchasing MSRs given the downturn on the origination front. This limit of capital on MSRs will definitely cause regional banks and bigger banks to pause and look at that strategy," said Becky Crain, senior vice president, real estate products at Regions Financial.
That would also have an impact on whether or how much depositories want to lend against servicing rights to independent mortgage banks.
"They have to think, 'What happens if there's something that goes wrong, and we have to take that collateral, what does that look like on our balance sheet?'" Johnson said.
Some depositories have already backed away from investing in servicing rights for other reasons, which could contribute to downward pressure on MSR prices, noted Jay Plum, executive vice president and head of mortgage at Fifth Third Bank.
"You also have a number of banks, Wells, most notably, but a few others who have traded their books, and thrown out a lot of supply. So more supply, less demand, prices will change. That's going to affect every IMB just like it's going to affect every bank," Plum said.
That said, with runoff risk from refinancing minimized by a period of high rates after a long run of low ones, mortgage servicing rights values so far have remained historically strong, noted moderator John Toohig, managing director, Raymond James & Associates.
"It's been an incredible year for MSR sales and prepayment speeds are as low as we may see in our careers," Toohig said.
Bank regulators may want to consider that in setting new capital requirements, Johnson said.
One regulator, Consumer Financial Protection Bureau Director Rohit Chopra — who weighed in on the capital rule as a member of the Federal Deposit Insurance Corp. board — defended the tightening in it when speaking in a separate session at the conference highlighting government-related speakers.
"Banks, especially big banks, get a lot of benefits from the public, big subsidies, direct and indirect, and I don't think the public should be on the hook for bailing them out when they're on the precipice of failure," Chopra said when asked about the rule by MBA President and CEO Bob Broeksmit.
Ensuring a sound banking system could help independent mortgage bankers and nondepositories in general as well, Chopra said.
"I think it is important to avoid potential economic calamity or frankly, interruption to the offering of financial services in the nonbank sector," he said.
But servicing rights haven't played as big a role in recent crises as some others, and might have even helped an institution like the troubled Silicon Valley manage rate-driven asset-liability mismatches that contributed to its woes, Johnson noted.
"MSR are a Level 3 asset, which means that you have to utilize complex models to price and they are subject to risks, particularly interest rate risks. But the spring failures, Silicon Valley, First Republic, Signature, the 2008 financial crisis, 1998 Long Term Capital crisis, the S&L crisis back in the early '80s, MSRs weren't the cause of any of these," he said.
Outside of the capital rule context, Chopra said he could see an argument for tweaking some of the bureau's servicing rules if it helped mortgage companies offer viable loss mitigation options to consumers.
"They can be very checklist-y, very prescriptive in their procedures, and I think the bullseye would be to create flexibility without undermining your work or protection that people have in the process of evaluating alternatives to foreclosure," said Chopra.
