The analysis seems to suggest that this potential change could be negative for mortgage servicers, as it would likely increase capital requirements.
The Basel III capital framework, which was finalized by the Federal Reserve Board in June 2019, lays out the minimum capital requirements that institutions must maintain to ensure their financial safety and soundness. The new regulations are set to go into effect at the beginning of 2021 and are intended to reduce the systemic risk posed by large bank holding companies. One aspect of the new framework that BTIG has taken issue with is the potential increase in risk-weightings for certain mortgage servicing activities.
In its analysis, BTIG found that most of the proposed changes would not have a large impact on the capital requirements of mortgage servicers due to the low risk-weightings that currently apply. However, the firm highlights a potential increase in the risk-weighting for repurchase agreements related to servicing advances. This increase could be particularly damaging to smaller and mid-sized servicers that typically rely on these arrangements.
The increased risk-weighting could also lead to fewer loan originations over time, according to BTIG’s analysis. As a result, mortgage servicers may find themselves unable to expand their business or acquire new clients as easily as before the implementation of the new regulations.
In conclusion, while the Basel III capital framework promises greater financial stability and soundness among larger banks, the same cannot be said for mortgage servicers. The increased risk-weightings proposed by the framework could have a harmful impact on the ability of these companies to efficiently manage their business. As such, BTIG urges regulators to consider the potential unintended consequences of the new regulations prior to their implementation in 2021.
This article was contributed on Jul 22, 2023
