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


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
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
  • 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.

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

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

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
  • 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.

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