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October 26, 2023 | Premium Service | In this edition of The Institutional Risk Analyst, we ponder the changing fortunes of the sector f/k/a fintech as it returns to its roots in subprime consumer lending. We dive deep into the world of Basel III and mortgage servicing rights (MSRs), arguably the cheapest capital asset in the world of mortgage finance. But first let's look in on Texas Capital Bank v. Government National Mortgage Association et al.
The fun in the litigation between Texas Capital Bank (TCBI) and Ginnie Mae has not really gotten started yet. Judging by the number of out-of-town counsel filing for admission to the court Pro Hac Vice this case will chew up a lot of billable hours. And each foreign attorney must find sponsors among local counsel within 50 miles of the Federal Courthouse in Amarillo, TX. TCBI is trading in the mid-$50s today vs almost $90 per share in 2021.
We reviewed this considerable mess previously (“Texas Capital Bank v Ginnie Mae”) and await developments with some trepidation. The cause of our discomfort is that the folks at Ginnie Mae have created a public process whereby the security of a loan on government guaranteed asset and/or MSRs is called into question. If TCBI is forced to take a loss on advances made to Reverse Mortgage Investment Trust (RMIT), then the whole market for financing government loans could be adversely impacted.
The legal battle between TCBI and Ginnie Mae raises another question, namely how the Basel III proposal will impact nonbank lenders and servicers. When a bank provides warehouse loans or financing for MSRs, the line is contracted for a term but the actual transaction is structured as a repurchase agreement. Regulatory skepticism about mortgage assets could effect financing rates for lenders, which means higher mortgage rates for consumers.