“The decision by many banks to reduce or exit subprime and distressed mortgage servicing in part reflects regulatory risks faced by these institutions in the migration to Basel III,” Fitch said.
Basel III limits the amount of mortgage servicing rights a bank can claim as Tier I capital to 10 percent, prompting many banks to take steps to reduce their servicing portfolios.
This environment is ideal for nonbank servicers such as Nationstar and Walter Investments as they take on subprime portfolios.
However, as servicers collectively continues to process these distressed loans and the market improves, specialty servicers will find less opportunity in this sector.
“[T]he sustainability of growth in the longer term will be constrained by the declining size of the subprime market reflecting the lack of new originations since 2007,” according to Fitch.
As a result, specialty servicers will likely need to turn to originations.
Fitch sees a potential for increased risk if future conditions necessitate a servicing transfer in the future.
“In high stress, low probability scenarios used to analyse the ratings of high investment-grade structured finance bonds, a potential large portfolio transfer of servicing may have negative rating implications for these bonds,” Fitch said.
However, an influx of small servicers in the market may help alleviate some of this risk, according to Fitch.
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