HOUSING FINANCE POLICY CENTER COMMENTARY URBAN INSTITUTE OASIS: A Securitization Born from MSR Transfers BY LAURIE GOODMAN AND PAMELA LEE On February 25, Ocwen Loan Servicing, the nation’s US residential loans. According to Inside Mortgage largest nonbank mortgage servicer,1 completed a Finance, for the past six years, the top three new type of quasi-securitization, Ocwen Asset mortgage servicers by market share have remained Servicing Income Series (OASIS 2014-1). Other unchanged—Wells Fargo, Chase, and Bank of nonbank servicers reportedly are working on America (not always in that order). What has similar transactions. OASIS 2014-1 was developed changed is the rapid spike in the share of the to help Ocwen fund its servicing business, which servicing market now held by nondepository has been growing as mortgage servicing has shifted institutions that specialize in servicing mortgage from depository institutions to nonbanks. This shift loans. has occurred in response to Basel III regulations, which make it more costly than in the past for large Table 1 shows the Top 10 mortgage servicers in banks to hold mortgage servicing rights (MSRs).2 In 2013 (nonbank institutions are shaded in blue). this commentary, we describe the changing With one exception, the largest banks reduced their mortgage servicing market and the reasons for balance of MSRs between the fourth quarters of those changes. We then look at Ocwen’s new 2012 and 2013. Bank of America reduced its MSR security, its purpose, and its appeal to investors. footprint by nearly 40 percent, and more than halved its overall share between 2011 and 2013; Mortgage Servicing Rights Have meanwhile, Chase reduced its mortgage servicing share by 9 percent since 2011. Shifted from Banks to Nonbanks In contrast, the country’s largest nonbank servicers Mortgage servicing has typically been dominated by (in order, Ocwen, Nationstar, PHH, Walter, and the big banks that also originate and securitize most Quicken) saw their market share grow, by as much Table 1: Top 10 Mortgage Servicers in 2013 Overall 2013 Share of Change in Change in Market Nonbank Total Mortgage Market Share Market Share Rank Servicer Ranking Servicing Market 4Q12–4Q13 2011–2013 1 Wells Fargo NA 18.5% –2% 4% 2 Chase NA 10.3% –8% –9% 3 Bank of America NA 8.2% –39% –52% 4 Ocwen Financial Corp 1 4.6% 124% 376% 5 Nationstar Mortgage 2 4.2% 100% 320% 6 Citi NA 4.0% –13% –23% 7 US Bank Home Mortgage NA 2.7% 2% 17% 8 PHH Mortgage 3 2.3% 23% 28% 9 Walter Investment Management 4 2.0% 130% NA 10 Quicken Loans 5 1.4% 75% NA Source: Inside Mortgage Finance www.urban.org 1 HOUSING FINANCE POLICY CENTER COMMENTARY • MARCH 31, 2014 as 130 percent, between the fourth quarter of 2012 The rapid growth of nonbank servicers has not gone and the fourth quarter of 2013. (Ocwen, Nationstar, unnoticed. Representative Maxine Waters (D-CA) and Walter are primarily servicers, though they do recently urged federal regulators to hold nonbank some lending; Quicken and PHH are nonbank servicers to heightened scrutiny. New York’s top originators and servicers.) banking regulator is evaluating several pending major MSR transactions in which Ocwen and As of 2013, five of the top 10 mortgage servicing Nationstar are the acquirers. firms were nonbanks (accounting for 15 percent of the total mortgage servicing market); in contrast, What’s Behind the Growth of nine of the top 10 servicers were banks in 2011, and in 2012, just two were nonbanks (representing Nonbank Servicers? 4 percent of the total market). The one nonbank The largest banks have been stepping back from the that has made appearances in the top 10 since 2008 $10 trillion MSR market in anticipation of (table 2) has never accounted for more than implementation of the Basel III bank capital 2 percent of the total market. standards, primarily through sales of distressed servicing—we would expect sales of nondistressed Table 3 looks at the share of the overall servicing servicing to follow. Basel III boosts the amount and market held by the top 10 servicers. The shift in quality of capital that banks must hold.3 Adopted by market share between banks and nonbanks in 2013 US regulators in 2013, it is a postcrisis update to the is striking. And a good deal of this represents the international Basel Accords, a comprehensive set of transfer of servicing of distressed loans. Many of the banking reforms to strengthen the safety and major banks that have sold servicing rights have soundness of financial markets. Basel I established disproportionately sold distressed servicing, which a risk-based capital framework under which requires a very high touch. Major banks have not different asset classes are assigned risk weights that developed the infrastructure to support a large correspond to their potential to default. The amount of high touch activity. In addition, banks amount of capital a bank must hold against an asset may view distressed servicing as a continuing class is based on multiplying the bank’s holdings of reputational drain, at a point when they are actively that class by the risk weight. trying to repair reputational damage from the crisis. The major sellers of nondistressed servicing have Although some major risk classes, including most been Ally and Flagstar, both of which have residential mortgages, are unchanged under experienced financial difficulties. Basel III, the new regime makes major changes to Table 2: Top 10 Mortgage Servicers by Market Share, 2008–2013 Rank 2008 2009 2010 2011 2012 2013 Bank of Bank of Bank of 1 19% 20% 20% Wells Fargo 18% Wells Fargo 19% Wells Fargo 19% America America America Bank of Bank of 2 Wells Fargo 16% Wells Fargo 17% Wells Fargo 17% 17% 13% Chase 10% America America Bank of 3 Chase 14% Chase 13% Chase 12% Chase 11% Chase 11% 8% America 4 CitiMortgage 7% Citi 7% Citi 6% Citi 5% Citi 4% Ocwen 5% Residential 5 3% GMAC 3% Ally 3% Ally 4% US Bank 3% Nationstar 4% Capital 6 National City 2% SunTrust 2% US Bank 2% US Bank 2% Nationstar 2% Citi 4% 7 IndyMac 2% US Bank 2% PHH Mortgage 2% PHH Mortgage 2% PHH Mortgage 2% US Bank 3% OneWest Residential 8 SunTrust 1% 2% SunTrust 2% SunTrust 2% 2% PHH Mortgage 2% Bank Capital 9 PHH Mortgage 1% PNC Mortgage 1% OneWest 1% PNC Mortgage 1% SunTrust 1% Walter 2% HSBC North 10 1% PHH Mortgage 1% PNC Mortgage 1% OneWest 1% PNC Mortgage 1% Quicken Loans 1% America Source: Inside Mortgage Finance www.urban.org 2 HOUSING FINANCE POLICY CENTER COMMENTARY • MARCH 31, 2014 Table 3: Share of Servicing Market Held by Top 10 Servicers Top 10 Servicers 2008 2009 2010 2011 2012 2013 Bank Share 65% 66% 64% 61% 54% 44% Nonbank Share 1% 1% 2% 2% 4% 15% Source: Inside Mortgage Finance and Urban Institute the treatment of MSRs. MSR treatment under pre- subject to a 250 percent risk weight, and the balance Basel III standards and under Basel III is will be subject to a dollar-for-dollar capital charge. summarized in table 4. Basel III rules will likely increase the cost of holding MSR assets. Let’s take the example of two hypothetical banks: one with MSR holdings that are within Basel III’s MSRs are an asset on a bank’s balance sheet. threshold requirements, and another with MSR assets Previously, as long as banks held MSRs as less than that exceed the thresholds. (Analysts5 indicate that 50 percent of their core Tier 1 capital (the key current MSR holdings at most large and mid-size measure of a bank’s financial strength), a base MSR banks are within the 10 percent Tier 1 requirement. risk weight of 100 percent applied. Capital was For most banks, the binding constraint will be the required to be held dollar for dollar over the very combined 15 percent threshold.) MSR assets currently high limit. Basel III shrinks the amount of MSRs carry a minimum capital requirement of 17.2 percent that will be subject to the lower risk weight, and (10 percent haircut6 plus 8 percent capital standard raises the minimum MSR risk weight. Under times 100 percent risk weight). Assuming an 8 percent Basel III, MSRs up to 10 percent of Tier 1 capital Tier 1 capital standard and removal of the 10 percent (with a more stringent definition of Tier 1 capital) haircut, a bank that is under the 10 percent individual will receive a 250 percent risk weight. Capital must and 15 percent combined thresholds will see the be held dollar for dollar over this more modest limit. minimum capital requirement for MSRs increase to There are situations in which punitive capital 20 percent (8 percent capital requirement times charges will apply even if MSRs are less than 250 percent risk weight). This does not seem to be a 10 percent. Under Basel III, if the combined balance significant increase over current regulatory capital of MSRs, deferred tax assets, and significant treatment of MSRs. investments in shares of unconsolidated financial institutions4 exceeds 15 percent, MSRs over that However, for banks holding MSRs above the limit will be subject to the dollar-for-dollar capital thresholds, the capital requirement will grow from charge. For example, if an institution has 9 percent the 17.2 percent Basel I requirement to 100 percent MSRs and 9 percent deferred tax assets and for MSRs exceeding the 10 percent MSR limit, or significant investments in shares of unconsolidated the 15 percent combined limit under Basel III. financial institutions, 6 percent of the MSRs will be Table 4: Treatment of MSRs Pre-Basel III Standards Basel III Capital Exclusion • MSRs are limited to 50 percent of Tier 1 capital for banks, • 10 percent cap on MSR contribution to capital.