OREANDA-NEWS. Recent fallout surrounding Ocwen Loan Servicing LLC is bringing U.S. banks back in greater numbers to the market as buyers of mortgage servicing rights (MSR's), according to Fitch Ratings.

In recent months, banks have agreed to purchase several bulk packages including MSR's from Ocwen, a large nonbank servicer. A number of factors are bringing about this change, among them the regulatory environment, improvements in bank portfolio makeup, bank interest in maintaining servicing scale, and market opportunity.

This is a marked change post-crisis, when several banks reduced their servicing exposure to underperforming loans through frequent sales of MSR's to non-bank entities. These sales, plus portfolio runoff and the improved economy and housing market have resulted in bank servicing portfolios which are now smaller and better performing. As a result, some banks have now positioned themselves as opportunistic buyers of MSR's, with an eye towards servicing performing agency loans.

Both bank and non-bank mortgage servicers have been under heightened regulatory scrutiny post-crisis. While both sectors have recently seen cases of regulatory findings and settlements, banks appear to be currently better positioned within the new regulatory framework. Broader bank controls may contribute to this differentiation. However, prior scrutiny that bank mortgage servicers saw in comparison to non-banks likely played a role as well.

In early 2012, key bank servicers were required to institute substantive changes as part of their agreement under National Mortgage Settlement (Settlement). Since many of the Settlement requirements were ultimately included in the Consumer Financial Protection Bureau's guidelines for all servicers in 2014, subject banks had a relatively easier transition. The greater comfort that banks have in the current regulatory environment has situated them as more potential buyers of mortgage servicing product than was the case several years ago.

Mortgage servicing today remains a business run most economically in large scale. Some servicers have incorporated techniques such as offshoring to increase flexibility and to reduce overall costs. However, most mortgage servicers saw their cost of servicing increase significantly during the post-crisis period as a result of higher fixed expenses associated with regulatory compliance. This has provided an incentive for nonbank servicers to grow, and for banks which have large mortgage servicing operations and have seen their portfolios shrink, to maintain scale when opportunities to acquire clean and standard servicing become available.

While scale is important, changed capital rules, including U.S. implementation of Basel III, will likely constrain significant growth by bank servicers in the future. Previously, banks were not subject to any regulatory restrictions on the amount of MSR exposure relative to capital. Under Basel III, MSR's are essentially limited to 10% of Tier I capital. To the extent that a bank holds MSR's that exceed the 10% threshold, the excess must be deducted from capital. Banks must seek to balance the impact of these capital rule changes against their desire to maintain well-scaled servicing operations.

Fitch will continue to monitor the portfolio transitions of the bank and nonbank servicers as they seek to maximize economics and strategic opportunities in an environment of continued regulatory scrutiny.