How Basel, GSE changes may upend MSR dynamics

The mortgage servicing rights market changed dramatically when the government-sponsored enterprises went into conservatorship and Basel bank capital rules tightened, so stakeholders are watching the review of both carefully.

Those two historic changes created the "perfect storm" for MSRs that led to a concentration of large nondepository players, an advocate for mid-sized banks said at an industry meeting on Friday, noting that certain outcomes of current policy reviews could change that.

Federal Reserve Vice Chair Michelle Bowman's acknowledgment of challenges in Basel III capital rules and interest in changing them is promising, Ron Haynie, senior vice president at the Independent Community Banks of America told attendees at the IMN MSR Conference.

"I think that would be good because that would mean you have community banks holding MSRs. You might have them actually buying MSRs," he said while speaking on a panel on conservatorship's influence on the market and related policy topics.

Haynie acknowledged this could create more competition for buyers but a moderate rebalancing of the participation between banks and non-depositories could be good for the overall market.

"I do think if the business were spread out a little bit, it would be a good thing," he said.

Potential impacts from changes at the GSEs

MSRs are generally defined by a series of contracts that the enterprises can easily change "unilaterally" through shifts in their guidelines, regardless of their conservatorship status, noted Eric Edwardson, a partner at law firm Mayer Brown.

"That can be for good or for ill. I think the recent trend is for good," he said, noting that changes such as the decision to cap Fannie Mae servicing advances at four months in alignment with Freddie Mac's during the pandemic exemplifies this.

The panel generally agreed that the near-term plan for the GSEs currently under consideration is most likely to involve keeping them in conservatorship with potentially a secondary offering of some of their shares. However, leaving conservatorship could still be an end goal.

Haynie said he's watching what the current review could mean for Fannie and Freddie's unified mortgage-backed security and the common securitization platform.

The UMBS was designed to align the enterprises' bonds despite the fact that they traditionally had different profiles. A shift in their status that could make them more like private companies may potentially put pressure on them to reverse what are currently harmonized prepay speeds.

"It'd be like saying, Wells Fargo, your book of business has to look like JPM's," Haynie said, noting that the idea for the UMBS was something he historically opposed and was originally intended for a scenario which did not materialize.

Panelists noted that FHFA Director Bill Pulte has said little about his plans for the UMBS and its supporting platform since reviving an idea to market the system more broadly and giving it a new name.

Edwards noted that Pulte's interest in having Fannie and Freddie do more with assumable or portable mortgages could shift market dynamics and unsettle some MBS holders.

"The folks who are buying the MBS securities would say, 'Hold on a second. You're changing some of the prepay speeds," he said.