Two cornerstones of the mortgage business—warehouse lending and servicing—will be penalized under the risk-based capital regime the federal banking agencies are adopting.

The provisions in the new Basel III capital rule “addressing mortgage servicing rights and warehouse lines of credit are particularly problematic,” according to the Mortgage Bankers Association.

The regulators have decided to treat warehouse lines of credit as commercial credits, which will increase the amount of capital banks must hold for warehouse lines.

The Federal Reserve will give favorable capital treatment for collateralized transactions that are backed by deposits of cash, gold or short-term debt securities. But not warehouse lines that are backed by residential mortgages.

“Residential mortgages can be highly idiosyncratic in regard to payment features, interest rate provisions, lien seniority and maturities,” the final rule says. The Federal Reserve Board approved the final Basel III capital rule at a July 2 meeting. (Adoption by the FDIC and OCC is expected soon.)

The American Bankers Association and other industry groups are generally pleased the regulators did not increase capital requirements for holding residential mortgages in portfolio. Conservatively underwritten single-family loans will continue to have a 50% risk weighting.

“But the treatment of mortgage servicing will drive a wedge between mortgage borrowers and lenders,” said ABA president and chief executive Frank Keating.

The banking regulators have decided to exclude most mortgage servicing rights from the capital calculation by yearend 2018 when the phase-in of the Basel III capital rule is slated to be complete.

The rule requires that MSRs, deferred tax assets and investments in unconsolidated financial institutions be limited individually to 10% and collectively to 15% of Tier I equity capital. MSRs that exceed the 10% or 15% thresholds must be deducted from capital.

“The Basel III final rule, when combined with the massive regulatory overhaul facing the real estate financial industry, will have the unfortunate effect of tightening credit, at a point in time when credit availability is one of the biggest challenges facing U.S. homebuyers,” said MBA president and CEO David Stevens.

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