The pending reform of depository capital rules has the potential for making it even tougher for banks to hold mortgage servicing rights, according to a recent BTIG report.
Banks could become heavier sellers as a result, analysts Eric Hagen and Jake Katsikis said in research published Tuesday.
"Depositories could further lighten their mortgage footprint in response to new regulatory standards anticipated within the next few weeks," they said in the report. "Broadly speaking, we expect banks could continue shedding MSRs if new capital requirements end up more restrictive than the 250% risk weight already in place through Basel."
There may be some upside for certain mortgage companies interested in buying Fannie Mae and Freddie Mac servicing that aren't depositories if a higher risk weighting for MSRs were to materialize, according to the analysts.
Large, publicly traded nonbank servicers and investors like Mr. Cooper, Annaly and Two Harbors would have "both the appetite and financial capacity to absorb 'large' bulk MSRs," the analysts said, noting that they would put portfolios with an unpaid principal balance greater than $10 billion in that category.
However, there are likely to be limits to the buying interest, they added.
"We're not expecting servicers to raise fresh equity or unsecured debt in the near term to target MSR purchases, although it could become more compelling if credit spreads show signs of tightening further," the BTIG analysts said.
Public mortgage companies like Ocwen, Rithm and PennyMac Financial also could be selective, and others focused on production like United Wholesale or Rocket are more likely to be sellers of MSRs.
To date, sales of mortgage servicing rights have totaled more than $370 billion in 2023, compared to $500 billion last year, according to BTIG.
There has been a growing amount of speculation around whether or not the new capital requirements reportedly coming later this month will change the risk weighting for mortgage-related assets.
An anonymous source close to the regulatory discussions has said large banks could face more punitive rules for home loans with higher loan-to-values, according to Bloomberg.
In addition, one trade group is concerned banking officials could impose capital reforms that would make it tougher for depositories to issue warehouse lines of credit, a source of funds that nonbanks rely on to fund their loan pipelines. The Mortgage Bankers Association has called upon regulators to avoid disrupting the market with such a move.
Some analysts would like to see higher risk weightings for the type of mortgage-backed securities holdings that contributed to the banking crisis, although others think it unlikely given that capital requirements haven't traditionally been focused on that type of concern.
Risk weighting has been based on credit and aimed at addressing concerns about borrowers not paying rather than the mortgage-backed securities-related asset-liability mismatches that occurred in the crisis when Silicon Valley Bank faced a run on deposits.
While officials like Michael Barr, the Federal Reserve's vice chair for supervision, have been focused on traditional capital regulation as a remedy for banking crisis issues, that type of solution "entirely avoids the problem," independent analyst and NMN columnist Chris Whalen, wrote in a recent blog.
The risk weightings for government bonds (0%) and for those from quasi-public entities like Fannie Mae and Freddie Mac (20%) are both low compared to whole loans with strong credit profiles (50%). Whalen suggested 50% should become a minimum for all MBS given their role in Silicon Valley Bank's failure.
