The Mortgage Bankers Association (MBA) has sent a letter to the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation expressing its opinion that proposed Regulatory Capital Rules should not go forward.  The three rules about which MBA expressed concern are the Regulatory Capital:  Implementation of Basel III (Regulatory Capital Rule); Standardized Approach for Risk-Weighted Assets (Standardized Approach); and Advanced Approaches Risk-based Capital Rule (Advanced Approach.)  The regulators had earlier invited public comment on the proposals.

MBA states in its letter that it "believes that the differences between the U.S. version of Basel III and the proposals of the European Commission are so pervasive that U.S. banks will have a major disadvantage in competing with overseas banks.  MBA believes that the prudential bank regulators in the U.S. need to re-think the entire proposed structure, and after addressing the Proposal's problematic elements raised herein, re-issue the Proposal for comment."

The Proposal, MBA says, would create an unlevel playing field for U.S. banks compared to their European counterparts and would adversely affect consumers by creating artificially tight credit conditions and higher costs.  Further, the layering of Basel III on top of other new or proposed rules would stifle real estate finance.  Community banks would be hurt by the complexity of the Proposal and the resulting costs and infrastructure needed to comply.  Regulators need to find a way to minimize the impact on these banks.

MBA laid out the ways in which the mortgage market will be affected by the Proposal:

  • Increased capital requirements will reduce overall lending relative to the current standards;
  • Increased risk-weights for mortgages, particularly those with certain characteristics, will concentrate bank holdings in loans absent those characteristics and concentrate loans with those characteristics in other capital sources.
  • Penalties on mortgage servicing rights (MSRs) above a 10 percent threshold could cause major market disruptions as servicing moves from large holders to others than might lack the capacity to economical service mortgages
  • New standards would impose higher costs on smaller institutions that may already be in compliance.

The structure of mortgage servicing and the importance of MSRs to banks are both unique to the U.S. and their existing treatment is appropriate and should be continued.  If regulators are going to insist on limiting MSRs on the balance sheets of banks then MBA says it should raise the allowable ratio to Tier 1 capital from the proposed 10 percent to at least 25 percent for commercial banks and 50 percent for savings and loan institutions and commercial/multifamily MSRs should be excluded from any rule changes because they do not have significant prepayment default risk.

The current risk weights for properly underwriting mortgage loans are sufficient and MBA recommends eliminating the new mortgage categories and retaining the 50 percent risk weight or harmonizing the new risk weights with those of other Basel Nations.   Higher loan-to-value (LTV) mortgage loans with solid private mortgage insurance should be included in the calculation of LTV ratios used in risk weighting.

MBA maintains that the proposed risk-weight treatment of private label securitizations held by banks is excessive because it works counter to a goal of increasing private capital's role in the market. 

  • The Dodd-Frank Act eliminates the ability of regulators to use the NRSRO credit ratings for establishing risk-weights and the alternative in the proposal, the simplified supervisory formula approach (SSFA) falls short and will constrict the availability of credit.
  • The Proposal's alternatives to SSFA both produce risk weights that are even more severe than the SSFA.
  • MBA recommends that SSFA be recalibrated to more closely approximate the risk-weights used in European Union institutions and until it is recalibrated, the current ratings-based approach should remain in place for structured securities.

MBA makes the following recommendations regarding the government sponsored enterprises (GSEs) mortgage backed securities (MBS).

  • Fix the treatment of credit-enhancing representations and warranties as it relates to the government's new policy framework for seller reps and warranties.
  • GSE guaranteed multi-family MBS should have a 20 percent risk-weight as should the tranches of a multifamily MBS guaranteed by the GSEs. Tranches of a multifamily MBS not GSE guaranteed should receive the same capital treatment as private label MBS.

 Independent mortgage companies should be allowed to include conforming and VHA/VA residential mortgages in their financial structure and should be allowed to "look through" a repo structure to the financial collateral held therein.