AB 2023 - 01: Valuation of Mortgage Servicing Rights for Managing Counterparty Credit Risk

Impact. This advisory bulletin requires mortgage servicers with GSE relationships to implement enhanced valuation methodologies specifically for assessing counterparty credit risk on mortgage servicing rights portfolios. Your risk management framework must now incorporate MSR-specific counterparty exposures into credit assessments, requiring updates to existing policies, monitoring systems, and due diligence procedures.

Risk. Model risk management bears the heaviest exposure here, as existing MSR valuation models likely lack the counterparty credit risk components FHFA expects to see. Third-party risk functions face scrutiny on vendor due diligence processes, particularly where MSR valuations rely on external data providers or valuation services that feed counterparty risk assessments.

Recommended Action. Have your Model Risk Management team conduct a gap analysis of current MSR valuation models against the bulletin's counterparty credit risk requirements. Simultaneously, Treasury should inventory existing MSR counterparty monitoring capabilities to identify system enhancement needs before the next GSE examination cycle.

Watch. Monitor for FHFA examination manual updates that translate this guidance into specific examination procedures. The advisory lacks implementation deadlines, but expect examiners to reference these standards during upcoming safety and soundness reviews of GSE counterparty risk management programs.