With ever-tightening TRID regulations — all the way from organizations down to the individual — and an increasing supply/demand mismatch, many mortgage professionals are getting nervous about what servicing rights will look like in 2016 and beyond.
2009’s Basel III reform measures set a three-year plan in place to tighten banking security, risk management and oversight strategy. Crafted specifically in response to the credit and housing bubble of 2008, the rulings codified capital requirements and leverage ratios for banks that up until that point had gone unspecified.
Ultimately, Basel III is intended to heighten the financial and banking landscape’s resilience, reducing the threat of system-wide impact and stabilizing it against economic stress. A side effect of these regulations is increased transparency — and reduced overall servicing capacity.
The capital requirements leveled by Basel III are uniformly capped, but different kinds of loans (within and without the mortgage sector) are differently weighted. This has led major banking conglomerates like Wells Fargo and Chase to examine their long-term prospects for servicing: given the new requirements and increased human capital necessitated by compliance efforts, will it actually be worth the time?
An acceptable return on investment may necessitate higher pricing, which in turn reduces the available customer base — even in the face of ever-heightening demand as the economy recovers from the 2008 bubble. The Fed’s end-of-year mortgage rate hike has been widely seen as a vote of confidence in the market’s recovery, but have since dropped a quarter-percent. Lenders who spent the first quarter of 2016 in the black have since reported massive markdowns, further dampening service pricing and increasing demand pressure.
While the situation may be concerning on its face, there are some factors at play whose as-of-yet unseen effects may tip the scales. In anticipation of rising rates, non-bank investors paid a premium for loan servicing throughout 2015 — but have scaled back in the new year. Additionally, lenders have begun to shy away from co-issue bidding (selling assets directly to mortgage loan companies and outsourcing servicing to specialized organizations), which up until recently accounted for over half of all servicing sales. This demand drop will have an unavoidable impact on servicing valuation (and, thus, consumer price) which is still playing out in the market.
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