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MBA Letter Addresses Basel III and it's Effects on Mortgage Markets

by devteam October 19th, 2012 | Share

The Mortgage Bankers Association (MBA)rnhas sent a letter to the Federal Reserve, Office of the Comptroller of thernCurrency and the Federal Deposit Insurance Corporation expressing its opinionrnthat proposed Regulatory Capital Rules should not go forward.  The three rules about which MBA expressedrnconcern are the Regulatory Capital: rnImplementation of Basel III (Regulatory Capital Rule); StandardizedrnApproach for Risk-Weighted Assets (Standardized Approach); and AdvancedrnApproaches Risk-based Capital Rule (Advanced Approach.)  The regulators had earlier invited publicrncomment on the proposals.</p

MBA states in its letter that it “believesrnthat the differences between the U.S. version of Basel III and the proposals ofrnthe European Commission are so pervasive that U.S. banks will have a majorrndisadvantage in competing with overseas banks. rnMBA believes that the prudential bank regulators in the U.S. need tornre-think the entire proposed structure, and after addressing the Proposal’srnproblematic elements raised herein, re-issue the Proposal for comment.”</p

The Proposal, MBA says, would create anrnunlevel playing field for U.S. banks compared to their European counterpartsrnand would adversely affect consumers by creating artificially tight creditrnconditions and higher costs.  Further,rnthe layering of Basel III on top of other new or proposed rules would stiflernreal estate finance.  Community banks wouldrnbe hurt by the complexity of the Proposal and the resulting costs andrninfrastructure needed to comply.  Regulatorsrnneed to find a way to minimize the impact on these banks.</p

MBA laid out the ways in which thernmortgage market will be affected by the Proposal:</p<ul class="unIndentedList"<liIncreasedrncapital requirements will reduce overall lending relative to the currentrnstandards;</li<liIncreasedrnrisk-weights for mortgages, particularly those with certain characteristics,rnwill concentrate bank holdings in loans absent those characteristics and concentraternloans with those characteristics in other capital sources.</li<liPenaltiesrnon mortgage servicing rights (MSRs) above a 10 percent threshold could causernmajor market disruptions as servicing moves from large holders to others than mightrnlack the capacity to economical service mortgages</li<liNewrnstandards would impose higher costs on smaller institutions that may already bernin compliance.</li</ul

Thernstructure of mortgage servicing and the importance of MSRs to banks are bothrnunique to the U.S. and their existing treatment is appropriate and should berncontinued.  If regulators are going torninsist on limiting MSRs on the balance sheets of banks then MBA says it should raisernthe allowable ratio to Tier 1 capital from the proposed 10 percent to at leastrn25 percent for commercial banks and 50 percent for savings and loanrninstitutions and commercial/multifamily MSRs should be excluded from any rulernchanges because they do not have significant prepayment default risk.</p

The current risk weights forrnproperly underwriting mortgage loans are sufficient and MBA recommendsrneliminating the new mortgage categories and retaining the 50 percent riskrnweight or harmonizing the new risk weights with those of other Basel Nations.   Higher loan-to-value (LTV) mortgage loans with solid private mortgagerninsurance should be included in the calculation of LTV ratios used in riskrnweighting.</p

MBArnmaintains that the proposed risk-weight treatment of private labelrnsecuritizations held by banks is excessive because it works counter to a goalrnof increasing private capital’s role in the market.  </p<ul class="unIndentedList"<liThernDodd-Frank Act eliminates the ability of regulators to use the NRSRO creditrnratings for establishing risk-weights and the alternative in the proposal, thernsimplified supervisory formula approach (SSFA) falls short and will constrictrnthe availability of credit.</li<liThernProposal's alternatives to SSFA both produce risk weights that are even morernsevere than the SSFA.</li<liMBArnrecommends that SSFA be recalibrated to more closely approximate thernrisk-weights used in European Union institutions and until it is recalibrated,rnthe current ratings-based approach should remain in place for structuredrnsecurities.</li</ul

MBA makes thernfollowing recommendations regarding the government sponsored enterprises (GSEs)rnmortgage backed securities (MBS). </p<ul class="unIndentedList"<liFix the treatment of credit-enhancing representations and warranties asrnit relates to the government's new policy framework for seller reps andrnwarranties.</li<liGSE guaranteed multi-family MBS should have a 20 percent risk-weight asrnshould the tranches of a multifamily MBS guaranteed by the GSEs. Tranches of a multifamily MBS not GSErnguaranteed should receive the same capital treatment as private label MBS. </li</ul

 Independent mortgagerncompanies should be allowed to include conforming and VHA/VA residentialrnmortgages in their financial structure and should be allowed to “look through”rna repo structure to the financial collateral held therein.

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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