Banks would welcome a proposal to loosen Basel III capital restrictions because it would make holding mortgage servicing rights easier and stem the recent exodus of depositories from the servicing business, executives said.

Federal banking regulators are evaluating a plan that would increase the percentage of Tier 1 capital that can be made up of MSRs to 25% from 10%, and reduce the pressure on banks to sell MSRs, said Lee Smith, executive vice president and chief operating officer at Flagstar Bank.

With a 10% limit, Flagstar is constantly selling because of the more punitive capital treatment its retained MSRs could otherwise face under existing Basel II capital rules, said Smith.

But if the limit is changed to 25%, "We can be a lot more patient," Smith said at the IMN Residential Mortgage Servicing Rights conference, taking place this week in New York.

Capital rule change

Other shifts in the market mentioned in forecasts for this year at the conference include more interest in and liquidity for Ginnie Mae MSRs.

But Ginnie MSRs are still "not an easy asset class," said Jeffrey Levine, managing director of the capital markets firm Houlihan Lokey.

Mortgage rate volatility, which was largely absent for many years, will be more of a concern in 2018, said Stan Middleman, president and CEO of Freedom Mortgage Corp.

"Hedging is really important in this part of the cycle" as a result, he said.

While rate volatility will be a challenge for the market, it won't necessarily deter buying, said Tom Millon, president and CEO of the Capital Markets Cooperative, a subsidiary of Computershare.

"We don't likely volatility," he said, but noted the company is still slightly more likely to buy this year.

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