Trades to Regulators: Capital Rules Could Spark Huge Mortgage Selloff

If federal regulators intend to impose tougher capital requirements on banks and thrifts that hold mortgages in portfolio, they should grandfather existing loans—and servicing rights—to prevent a sell off, according to three trade groups.

The proposed Basel III capital standards will “dramatically” increase risk weights on mortgage assets, according to a new joint comment letter from the American Bankers Association, Financial Services Roundtable, and the Securities Industry and Financial Markets Association.

A capital hike of this magnitude might force banks to “sell off and shrink their residential mortgage portfolios, thereby reducing the amount of credit available to borrowers,” the joint comment letter says.

The trade groups estimate the amount of capital required to hold mortgage servicing rights would jump to 28% under the proposal from 17.2% today, a 62% increase.

“The proposed capital treatment is so much more stringent than the current treatment,” the comment letter says. This would “disproportionately impact” banks that hold servicing rights on mortgages they sell—to maintain customer relationships. 

The commenters argue that grandfathering is warranted because many banks would not have accumulated large servicing portfolios if they knew their “ability to include MSRs in regulatory capital would be so sharply curtailed” by the regulators.

“In addition, the agencies have provided no empirical evidence to support the conclusion that these existing MSAs—especially ones related to seasoned mortgages that have thus far survived the worst of  the mortgage crisis—are so risky that the warrant a much higher, retroactively imposed charge for regulatory capital,” the Oct. 22 comment letter says.