US Mortgage Servicing Rights Market Stays Hot

Fresh evidence over the past few weeks that there is no let up in the secondary market for Mortgage Servicing Rights or “MSR’s” as MetLife announced the sale of its servicing portfolio to JP Morgan and Bank of America seems about to chip in with another large sale.  The MetLife trade was for some $70Billion and the BoA trade may wind up in the $100Billion range.  That’s approaching $200Billion in sales from just these two organizations within the last several weeks.

Clearly the new regulatory regime, including the new Basel III rules for balance sheet treatment of mortgage servicing rights continues to have an effect on the traditional “originate and service” model that the US mortgage industry had grown accustom to for many, many years, particularly among the large retail banks like BoA.

Without a clear benefit of being able to apply these servicing rights, dollar for dollar, to a bank’s regulatory capital requirements, it is easy to understand how this rule is changing the way that banks look at their mortgage businesses; perhaps forever.  We’re not so sure that now that the dust from the credit crisis has settled and cooler heads may prevail that this isn’t one of the Basel III standards that rational folks might now agree goes a bit too far.

Assuming that underwriting standards will always be suspect, no matter how well an institution is run or how strong the regulatory process is, seems to be a bit of “double taxing” on the banks and other mortgage originators.  Certainly it isn’t hard to understand that the new regulations have a high potential for limiting capacity in the mortgage markets, whether or not there is a reasonably strong secondary market for MSR’s.

Europe Hopes that PCS “seal of approval” Will Reignite Investor Confidence in ABS Market

Last week’s formal announcement by the Association for Financial Markets in Europe or “AFME” that they had named board members to their Prime Collateralised Securities initiative or “PCS” is the Euromarket’s latest attempt to revive the moribund European asset-backed marketplace.  The central theme behind the initiative is to get issuers to live up to an array of industry standards for quality, transparency and simplicity, thereby establishing a widely recognized “gold standard” for abs investors to rely upon.

On November 14th the Association announced the new board members:

Francesco Papadia, former Director General for Market Operations at the European Central Bank

Anneli Peshkoff, former Director of Treasury at the European Investment Bank

Prof Jose Campa, former Secretary of State for the Economy in the Spanish Ministry of Economy and Finance

Gregor Gruber, Allianz Investment Management

Gaelle Philippe Viriot, Head of ABS at Axa Investment Managers

Richard Bartlett, RBS Head of Corporate Debt Capital Markets and Risk Solutions

Mirco Bianchi, UniCredit Head of Group Finance

Michaela Ulrici, NautaDuthil, Chair of the Board

Ian Bell, Head of the PCS Secretariat

It is expected that this board will award its first PCS designations before the end of the year. We found it interesting to note that the PCS will utilize the services of the Irish Stock Exchange, the True Sale Initiative and KPMG to “assist” the PCS board in reviewing and analyzing related documentation. We hate to say it but as time goes on, how much more reliable might the PCS designation be then what many held out for the work of the major rating agencies before the crisis. Only time will tell.

For now, we believe that the establishment of more standardization in such critical areas as collateral quality and disclosure can only be a good thing.  Not necessarily as convinced about the “structural simplicity” angle, as issuers and investors should have the discretion to form structures that suit their specific needs.  However, that does not mean that even some standardization around structures, particularly for those abs products that may look to trade in the secondary markets, would not produce a market benefit.  We just don’t think you can always judge relative quality based on varying levels of complexity.  Perhaps we are wrong about that but we will see.

For now it is good to know that the European Central Bank and other lead regulators in Europe are throwing their weight behind the initiative and if the only positive result that comes from this is a marginal increase in investor confidence, then the excercise would have been deemed a success.  Over time, expectations for what the designation means will likely rise, perhaps in the form of consistently improved trading volumes and of course pricing.