Swiss-Based Basel Accord Requires Banks to Disproportionately Increase
Capital to Maintain Servicing Rights, So Third Party Servicers May
Have New Market Edge

One of the most important agreements you’ve never heard of may provide independent servicers with a big market opportunity later this year—Basel III

Never heard of Basel III? You’re probably not alone. The Basel Accords is an international group of experts formed in 2009 to study bank liquidity out of the center’s headquarters in Basel, Switzerland. Because the banking industry is no longer local nor even national, blips in Greece affect banks in Ozark, Arkansas overnight. Therefore, if all financial institutions had similar and adequate capital and liquidity standards, banks could survive market forces better. The Federal Reserve has adopted many of the recommendations of Basel III and much of the requirements of Basel III will be applied to American banks in 2013 and 2014.

One of the liquidity requirements of Basel III is to require banks to set aside specific amounts of capital if they exercise Mortgage Servicing Rights (“MSRs”). Most of the big lenders are starting to reduce their MSRs' size. By way of example, Ally Bank sold Quicken Loans its servicing rights for $34 million dollars. Bank of America followed suit and sold its MSR to Nationstar Mortgage. Most banks are dumping their MSR, on the rationale that if they are going to have capital, it should not be restricted and a reliable source of capital is essential.

Independent servicers, financed by hedge funds are financing the purchases, betting that loan will remain outstanding for a longer, rather than a shorter period of time, and those interest rates will uptick.

Although banks are well suited to service mortgage loans, the new capital requirements will force independent servicers to take up the slack, and we are likely to see mortgage pool owners pick their new dance partners over the next few months.

Where does this leave the leasing industry? Most portfolios are small enough not to require bank servicing but many pools do use banks to service the leases. I would expect that most banks will be out of the servicing business by the end of 2013.

If a reader either works for a bank servicer, or has servicing experience, then 2013 may be a good year to be flexible in term of employment opportunities.

Tom McCurnin is a partner at Barton, Klugman & Oetting in Los Angeles, California.