The Federal Deposit Insurance Corp. voted this week to tighten rules that affect banks and savings institutions devoting a large part of their business to collecting mortgage payments.
The board of the agency voted 4-0 to allow no more than 50 percent of an institution's capital to be made up of the collection contracts, known as mortgage-servicing rights.The Office of the Comptroller of the Currency, which regulates nationally chartered banks, already has an even stricter limit, 25 percent. But state-chartered banks and S&Ls had no limit.
The S&L bailout law enacted in August 1989 required regulators to come up with a rule on the mortgage-servicing rights. They had been debating it since February.
The issue was whether the value of the servicing contracts was too risky to count as capital, which represents the owner's investment in a financial institution and acts as a loss-absorbing buffer, protecting government deposit insurance funds.
Mortgage-servicing rights are bought and sold among financial institutions. After purchasing the right, institutions can then earn a steady stream of fees for collecting monthly payments. They forward the payments to the actual owners of the mortgages, often a secondary mortgage company such as Freddie Mac and Fannie Mae.
However, there is a risk. If interest rates drop and homeowners refinance their loans, the old mortgages, and the value of the right to service them, disappear.