Are Regulators Driving Banks Out of Mortgage Servicing?
By Victoria Finkle
Financial institutions are raising renewed alarms about a set of regulations that they say are forcing banks out of the servicing business as they sell their rights to nonbanks. Regulators finalized Basel III rules last summer that placed significant restrictions on banks’ ability to hold mortgage servicing rights, particularly for smaller institutions. As a result, the regulations are hastening banks’ exit from servicing and stoking fears that the agencies went too far. At issue is a provision in the Basel package of rules that would limit mortgage servicing assets to 10% of a bank’s Tier 1 common equity, with additional holdings deducted from the Tier 1 capital account. Assets under the 10% cap would also eventually be risk-weighted at 250%. In addition, combined holdings of mortgage servicing and several other assets are limited to 15%. Critics argue that the Basel III provision is further accelerating the transfer of mortgage servicing business from banks to nonbanks — a move already under way due to a number of market forces. “In the last couple of years, the nonbank servicers have exponentially grown, and are now controlling about half of the market,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics.