How Proposed Basel III Rules Could Impact MSRs

By: Ellen R. Marshall
– DS News

The value of mortgage servicing rights (MSRs) may be changing and the market for acquiring MSRs may be heating up. This market phenomenon is the result of the proposed Basel III capital rules applicable to banks.

For non-banks, the Basel III rules may seem irrelevant, but that could be a mistake. The Basel III rules could change how MSRs are priced, who owns the MSRs, and ultimately which servicers handle servicing for the loans that relate to the MSRs. More importantly, for non-banks, these MSRs may present interesting investment opportunities.

First some background. MSRs represent the right to receive an interest-only (IO) strip from a pool of mortgage loans. Ownership of the MSR entitles the owner to receive this IO strip in exchange for providing the servicing function.

The owner can service the loans itself, if it has the infrastructure to do so, or the owner can engage a subservicer to do the servicing function.

Banks are required to hold capital in proportion to their assets, including MSRs they hold. Under the risk-based capital system that has been in place since 1992, asset-types have been risk-weighted for purposes of calculating capital requirements, and MSRs have carried a 100% risk weighting.