This Month In Retail Banking
Mortgage Servicing Rights (MSR), the contractual rights to service mortgage loans, are a vitally important asset in the industry. But because of current market conditions and scrutiny by the Consumer Financial Protection Bureau (CFPB), lenders will need to remain attentive to their MSR valuations to mitigate potential risks and to ensure compliance. Here are several important considerations:
Interest rate environment
Amid historically high interest rates, the mortgage market is experiencing a shift in refinancing activity and borrower behavior. These higher rates may lead to reduced speeds of prepayment and increased delinquencies, thereby affecting MSR valuations. To account for their impact, lenders will need to monitor and adjust their MSR valuations continually.
To ensure compliance with the Consumer Financial Protection Act (CFPA) and other laws, the CFPB has increased its scrutiny of mortgage servicers, with a focus on the servicing of defaulted loans and the handling of foreclosure proceedings. Under the laws, mortgage servicers must provide borrowers with accurate and timely information about their loans and adhere to proper foreclosure procedures. The CFPB will also be examining practices related to loss mitigation, loan modifications and debt collection. With this in mind, mortgage servicers should review their policies and procedures to ensure compliance with these requirements and prepare for increased CFPB scrutiny in general.
Balance sheet risks and impairment
When an MSR’s market value falls below its carrying amount, it results in an impairment, posing a balance sheet risk. In such cases, lenders are required to recognize an impairment charge against their income and establish a valuation allowance to adjust the carrying amount of the MSR. This accounting treatment helps maintain the accuracy and reliability of financial statements while mitigating and potential risks to the balance sheet.
Housing market fluctuations, interest rate changes and other macroeconomic dynamics can affect MSR valuations. Lenders, therefore, need to monitor market conditions closely and adjust their MSR valuations accordingly, updating assumptions about prepayment speeds, discount rates and other influential factors.
Because they may portend increases to defaults and losses, changes to borrower credit quality can affect MSR valuations. This makes it essential that lenders assess their mortgage portfolios’ credit risk, monitor delinquency rate trends and adjust MSR valuations to account for potential losses.
In light of the multitude of factors affecting MSR valuations, lenders need to remain vigilant. By closely monitoring market conditions, regulatory changes and credit risk, they can ensure that their MSR valuations are accurate and thereby mitigate potential risks and safeguard their portfolios against future challenges.