BWFT Regulatory Brief:
“It’s time to get back to basics” – FDIC Chairman Jelena McWilliams
Summary
- In her most recent speech FDIC Chairman Jelena McWilliams was unequivocal about her desire to reduce regulatory burden for Community Banks allowing them to free up capital to deploy.
- We believe any potential Community Banking relief to be a meaningful on-horizon catalyst for tighter spreads, better pricing and even better liquidity.
- We expect to see Bank demand for Mortgage Servicing rise dramatically and as an indirect result, a much stronger bank ‘bid’ for mortgage servicing.
- If long-end rates continue to hover where they are, we expect a strong pick up in MSR pricing for Bulk, mini-bulk and co-issue sales given new Bank entrant demand and current lack of supply.
- We estimate spread tightening potential in conventional and government MSR to be upwards of 50 OAS bps / 0.25 mult with the latter investor having better upside.
- Further we expect co-issue to bulk spreads to tighten dramatically given heavy bank demand and lack of sizeable bulk offerings on the horizon.
On the FDIC Speech, Key Points for MSR
On Friday the FDIC Chairman Jelena McWilliams gave a speech at the Federal Reserve Bank of Chicago discussing potential capital relief considerations for community banks with assets less than 10 billion. She also outlined a regulatory-light path forward.
Community Bank Leverage Rate or “CBLR” as Ms. McWilliams described it will simplify existing risk-based capital requirements if a given bank meets a ‘simple ratio of tangible equity to total assets’.
The FDIC estimates as many as 80 percent of community banks with less than $10 billion in assets will be able to seek this relief. The FDIC vote is scheduled for Tuesday.
The Chairman also suggested that for banks who do not adopt CBLR, additional capital relief will be sought specifically for Mortgage Servicing Rights.
Interested readers can find a copy of the speech on the FDIC web site here.
Our Take: The Banks are Coming!
BWFT sees this as generally constructive for Mortgage Servicing pricing and distribution.
The current Basel III requirements have faced a significant Industry push back given their onerous terms. The MBA has done an excellent job distilling this material on their web site here.
As outlined by the Chairman, the new rules as proposed likely surpass the Industry proposal seen here in terms of being regulatorily friendly to Mortgage Banking. This new rule if adopted will likely simplify the existing Basel III compliance requirements and make owning MSR far more appealing for Community Banks, and, as the Chairman offered, there is likely downstream impact making it more appealing for larger Banks also.
What this Likely Means: Already High Prices go … Higher
It is no secret that Mortgage Servicing pricing has benefited from the run up in interest rates. Readily available financing, rumors of a constructive regulatory regime (now seemingly confirmed), and new sources of private capital have buoyed MSR to levels not seen in years. We believe Community Banking relief to be a meaningful on-horizon catalyst for tighter spreads, better pricing and even better liquidity. If adopted, this proposal, taken with the general tone adopted by the FDIC chair (in this speech and others), signals a highly constructive backdrop for bank participation and retention of mortgage servicing.
We expect to see Bank demand for Mortgage Servicing rise dramatically and as an indirect result, a much stronger bank ‘bid’ for mortgage servicing.
For independent mortgage bankers, increased bank demand poses a competitive pressure at an inopportune time with slowing refi-related activity, slowing purchase demand, and higher fixed costs. On the other hand, for IMBs that currently hold MSR or are looking for a co-issue outlet, BWFT believes this to be a potential opportunity. If long end rates continue to hover where they are, we expect a strong pick up MSR pricing for Bulk, mini-bulk and co-issue sales given new Bank entrant demand and lack of supply.
Based off many recent conversations through our franchise, the interest to hold and hedge the MSR asset by various market participants has been high. The proposed changes add additional support to the asset class and we expect to see a degree of meaningful price appreciation. We estimate spread tightening potential in conventional and government MSR to be upwards of 50 OAS bps (~0.25x multiple) with the latter investor having better upside. Further we expect co-issue to bulk spreads to tighten dramatically given heavy bank demand and participation in electronic platforms.
Have questions?
Drop us a line at inquiries@bluewater-fintech.com or reach us below:
Al Qureshi – Managing Partner – aqureshi@bluewater-fintech.com
Jason Sweeney – Executive Director, Business Development jsweeney@bluewater-fintech.com