Regulators Scrutinize MSR Values
The incredible runoff rate for residential servicing rights has prompted federal banking regulators to step up their examinations of large depository-owned mortgage banking shops.
Bank examiners want to make sure banks are properly valuing mortgage servicing assets (MSAs), recognizing impairment and adequately hedging their servicing portfolios.
Commercial banks and thrifts are the largest residential servicers in the nation, according to figures compiled by this newspaper.
At the end of the fourth quarter, Washington Mutual, Seattle, a thrift, ranked first in the nation with a servicing market share of 11.47%. Wells Fargo's mortgage unit ranked second with a 9.05% share. (Wells is a commercial bank.)
Over the past five years, both WaMu and Wells have been major buyers of other mortgage banking franchises. These purchases include the acquisition of servicing rights or "housing-related" receivables.
An interagency advisory drafted by the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Federal Reserve and the Office of Thrift Supervision, asks that depositories use market-based assumptions that are "reasonable and supportable in estimating the fair value of servicing assets."
Servicing rights can become impaired when interest rates fall and borrowers refinance and repay their mortgage loans.
Several large servicers have recorded huge impairment charges during the refi boom of the past two years, but many have been hedged or earned so much money on front-end origination fees that it hasn't been an issue.
Regulators note, "This impairment can lead to earnings volatility and erosion of capital, if the risk inherent in the MSAs have not been adequately hedged."
The advisory tells examiners to be on the watch for unsupported prepayment speeds, discount rates and other assumptions in MSA valuation models; frequent changes in assumptions used to value MSAs; and servicers who fail to properly stratify MSAs for impairment testing.
"The banking agencies may require additional capital for institutions that fail to exercise the sound practices set forth in this advisory," says the Feb. 25 interagency advisory.
Paul Muolo also contributed to this report.
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