The Federal Reserve Board has published a FEDS Note in which Board staff assess how mortgage servicing rights at large banks would perform under the supervisory severely adverse stress scenario. Using supervisory stress test data and models, the note estimates that higher mortgage defaults would reduce aggregate mortgage servicing right values on banks' current servicing books by about 4.8%, but the decline could rise to about 8.3% if recent home price gains are stripped out and to 13.4% if bank portfolios resemble the broader agency servicing market. Staff also estimate that mortgage servicing right values fall by around 4% for each 1 percentage point increase in mortgage prepayment rates. The analysis covers mortgages serviced for Fannie Mae, Freddie Mac, and Ginnie Mae and applies the 2024 supervisory first-lien mortgage model under a severely adverse scenario in which unemployment rises to 10%, mortgage rates fall from 7.3% to 3.1%, and house prices decline by 36%. Current large-bank servicing books appear less exposed than the overall market because they are concentrated in older, lower loan-to-value loans and have limited Ginnie Mae exposure, while Ginnie Mae servicing is more vulnerable to default-related losses because servicing costs are higher and Department of Veterans Affairs guarantees can be capped. The note also finds that rate-driven prepayment shocks could materially reduce mortgage servicing right values, implying about a 20% decline for current large-bank servicing books and about 14% for the market as a whole, although it says those effects may be partly offset for banks by hedges, refinancing income, and the creation of new mortgage servicing rights.
Federal Reserve Board2026-06-04
Federal Reserve Board staff note estimates bank mortgage servicing right losses of 5% to 13% under severe stress
The Federal Reserve Board published a FEDS Note assessing mortgage servicing rights at large banks under a severely adverse stress scenario. Staff estimate current large-bank servicing books would lose about 4.8% of value, 8.3% if recent home price gains are excluded, and 13.4% if portfolios resembled the broader agency market, with values falling about 4% for each 1 percentage point increase in mortgage prepayment rates. The note finds large-bank books are less exposed than the overall market due to older, lower loan-to-value loans and limited Ginnie Mae exposure, but warns that rate-driven prepayment shocks could still reduce mortgage servicing right values by about 20% for large banks and 14% for the market.