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Basel III Delay a Good Sign

Mortgage bankers weigh in on regulators' decision to delay

Nov. 12, 2012

By Mortgage Daily staff


With the delay in the implementation of Basel III rules, a mortgage catastrophe was averted. Industry groups warn that the rules threaten to raise the cost of credit and reduce available credit.

Three notices of proposed rulemaking in June had Basel III going into effect on Jan. 1, 2013.

But the industry complained that the Jan. 1 date didn't allow enough time to make changes to their systems or understand the rule.

Regulators responded.

On Friday, a joint announcement from the Federal Deposit Insurance Corp., the Federal Reserve Board and the Office of the Comptroller of the Currency indicated that proposed Basel III rules are not expected to be implemented by the Jan. 1 date.

"As members of the Basel Committee on Banking Supervision, the U.S. agencies take seriously our internationally agreed timing commitments regarding the implementation of Basel III and are working as expeditiously as possible to complete the rulemaking process," the regulators' statement said. "As with any rule, the agencies will take operational and other considerations into account when determining appropriate implementation dates and associated transition periods."

Basel III is an international set of bank capital guidelines. It will raise banks' required equity to 4.5 percent from 2 percent as required by Basel II. It will also push required Tier I capital to 6 percent from 4 percent of risk-weighted assets.

Pimco, which manages nearly $2 trillion in assets, explained in its Viewpoints newsletter how mortgage servicing is impacted.

"Among other changes potentially impacting the mortgage market, Basel III imposes increased capital charges on retained mortgage servicing, which further increases the cost of securitization as servicers who retain the servicing will be subject to more onerous capital charges," the newsletter said. "Currently, 100 percent of the value of mortgage servicing rights is applied to Tier I capital. Under Basel III, the capital benefit of mortgage servicing rights will gradually be phased down to 15 percent of equity capital."

Mortgage Bankers Association President and Chief Executive Officer David H. Stevens sees the delay as a positive development.

Stevens is optimistic that the delay is a signal that regulators are rethinking the "problematic" rule.

"The rules, as proposed this summer, would have had serious negative repercussions across the lending landscape, with the impact felt most acutely by residential, commercial and multifamily real estate borrowers, investors and lenders in the form of tighter credit and higher costs," Stevens said in a written statement.

The American Bankers Association joined the Financial Services Roundtable and the Securities Industry and Financial Markets Association in expressing serious concerns about Basel III rules, which "would instead make banks less safe and slow down economic growth."

Bankers warn that the proposal will reduce credit availability, hurt economic growth and harm the competitiveness of the U.S. banking sector.

"It is critical now that regulators re-propose Basel implementation rules that more appropriately allocate risk-weights on real estate-related assets, whether they be residential, commercial or multifamily loans and securities and/or servicing rights," MBA's Stevens added. "Otherwise, credit for real estate transactions will tighten and consumer and borrower costs will go up, as banks reduce their real estate lending and mortgage servicing business."

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