Secondary market.

Author:Taliefero, Michael
Position:Regulators' efforts to limit the counting of mortgage servicing rights as capital - Column


In the past several years banking regulators have tried to limit the extent to which mortgage servicing rights can count as capital. The issue first arose in the context of the international risk-based capital formula, the so-called "Basle Accord," among the banking regulators of the western world. The group originally agreed to require a deduction from capital for all intangible assets on the books of financial institutions. Because American institutions were the only ones that had significant intangible assets on their books, we maintained that U.S. regulators should be free to set their own standards in this area. Fortunately, the U.S. regulators were able to persuade the regulators from other countries to go along with this approach. In the months that followed, MBA turned its attention to the actions of the Fed, OTS, FDIC and the OCC. The thrust of our argument with these regulators was that purchased mortgage servicing rights was not like just any old intangible asset--it was special because it was an "identifiable" intangible, not an unidentifiable intangible like goodwill. At the time, 1987, most of our bank and BHC-owned members thought they would be comfortable with a 25-percent limit on PMSR in capital. During the next couple of years, however, wholesale mortgage banking and servicing acquisition strategies of many companies expanded significantly thus placing large amounts of PMSR on the books. Suddenly the prospect of a 25 percent limit didn't look so good anymore. During the next two years the regulators would begin to make their decisions on how to treat PMSR for regulatory capital purposes. The Fed decided to continue its case-by-case review of all intangibles with special scrutiny of these assets when they comprise 25 percent of assets. The OCC established a 25 percent of Tier 1 capital limitation that it is now re-examining. FIRREA required a 10 percent haircut for PMSR on the books of OTS-regulated thrifts and required the FDIC to establish a limitation on PMSR for state non-member banks that the OTS would also have to follow.

In carrying out their responsibilities under FIRREA, last February, the FDIC proposed to limit the inclusion of purchased mortgage servicing rights (PMSR) to 25 percent of core capital. We believed that if such a limitation were allowed to be enacted it would have had a serious negative impact on bank/thrift-affiliated mortgage companies and the value of servicing. On December 11...

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