The same day New York’s top bank regulator warned of potential harm to borrowers and investors from an increase in non-bank servicers’ market share, community bankers called on regulators to make it easier for financial institutions to hold on to mortgage servicing rights.
New York Superintendent of Financial Services Benjamin M. Lawsky told attendees Tuesday at the Mortgage Bankers Association’s 2014 National Secondary Market Conference that new capital requirements are driving banks to unload MSRs.
On the buying side of those MSR sales are non-bank mortgage servicers, which are motivated to cut costs and increase earnings.
Lawsky warned that investors and distressed borrowers will pay the price for the cut-rate services.
“Borrowers and investors both suffer when a servicer does not know how to pull together its loan files strewn around the globe,” Lawsky stated. “Or when a servicer is unable to extract information from its many incompatible computer systems at the right time and for the right purpose. Or when a borrower cannot get a straight answer from a servicer on a loan modification that could both save a family’s home and reduce an investor’s losses.”
In line with Lawsky’s comments, the Independent Community Bankers of America issued a letter Tuesday to the Comptroller of the Currency, the Federal Reserve Board chair and the chairman of the Federal Deposit Insurance Corp. asking that stricter mortgage servicing regulations not be imposed on community banks.
The Washington, D.C.-based organization said it continues to be concerned about the implementation of Basel III regulatory capital standards — which reduce the maximum servicing assets to 10 percent of tier 1 capital from 100 percent — on its members and the adverse impact of those standards on MSRs they own.
“The implementation of harsh, radical, and damaging penalties on the mortgage servicing assets of community banks serves to greatly diminish the value of community banks as they are forced to severely limit the number of mortgages they service,” the letter stated.
Instead of sending a message to community banks that they should not service the loans they originate, the regulators should be encouraging the sector to retain servicing rights.
“Larger mortgage servicers, increasingly becoming composed of non-bank servicing organizations, view mortgage servicing as a commodity business that is driven by economies of scale with large volumes and minimal ongoing investment,” the ICBA stated. “This business model results in poor customer service and conflicts of interest particularly when local economies experience a housing downturn. This is because larger mortgage servicers are often less sensitive to the needs of the community and less sympathetic if risk mitigation is required.”
In addition, the ICBA said that regulators have failed to recognized that MSRs on a bank’s balance sheet help to hedge against rising interest rates.
The trade group wants community banks — those with assets of no more than $50 billion — to be exempt from Basel III treatment of MSRs.
The ICBA warned that if regulators don’t act quickly enough, then community banks’ current mortgage borrowers will move to “non-bank mortgage servicing firms that are much less regulated with financial interests that may not always be aligned with the owner of the loan and the associated security interests.”
