The advent of Basel III and its effects on MSRs, the difficulty of hedging mortgage servicing rights, and the strain of making advances to investors are all driving the regulatory search for a new way to compensate servicers.
A panelist at a Mortgage Bankers Association conference noted that hedging MSRs can be quite costly and the new Basel III capital requirements will cap how much the asset can count toward core capital.
Richard Dorfman, managing director of the Securities Industry and Financial Markets Association, said moving to a "fee for service" model would eliminate MSR hedging and ensure a continuity of cash flows to investors.
But another panelist said it could raise problems for investors who will insist that servicers have some "skin in the game."
Government National Mortgage Association president Ted Tozer noted that it could become difficult to transfer servicing rights from a troubled mortgage banker if there is no readily available income stream for the new servicer.
In 2008, there were discussions about moving from the standard 25 basis point fee to requiring the servicer to hold a principal and interest strip of the MBS. (An MSR acts like an interest-only strip.)
"A P&I strip has less volatility, less cost to hedge, and it was pretty well supported among the stakeholders," said Fannie Mae senior vice president of capital markets Andrew BonSalle. But this approach was placed on hold due to the pending financial crisis, BonSalle said.
