Market for MSRs Not So Lopsided After All

Mortgage & Real Estate









Large banks not to mention at least one nonbank are under intense pressure to sell of mortgage servicing rights. But there’s still a fair amount of buying interest from other quarters of the market, which means the balance between supply and demand is not as lopsided as it might appear.

Nonbank servicing giant Ocwen has MSR sales in the works. At the same time, capital restrictions on MSRs under the Basel III rules that regulators are officially phasing in this year are encouraging bank servicers to scale down their portfolios. In addition, there are questions about whether the lowering of government loan premiums and other Federal Housing Administration policy changes could lower some Ginnie Mae MSR valuations considered in transactions.

While that sounds like a lot of reasons to sell MSRs, that doesn’t mean it’s a buyer’s market, according to Matt Maurer, managing director at MountainView Servicing Group.

“We’re still seeing demand outstrip supply,” he said.

Investment funds, particularly those with specific servicing rights allocations, are creating strong demand for certain product, added Randy Lightbody, a managing director with Accenture Credit Services. That’s because these funds must utilize the allocations they have earmarked for MSR investments or they lose it, he noted.

Demand is strongest for “co-issue flow deals,” where a buyer agrees to buy servicing going forward as loans are made, rather than on a bundled package of pre-existing loans, Lightbody said.

Bulk packages of recently-originated servicing, while not as popular as the flow deals, also are in demand, he added.

Bulk deals may be sold with a co-issue option, though the buyer base for the two may differ, said Maurer.

“Your best bulk bidder is not necessarily going to be your best flow bidder,” he said.

Depending on the type of package and size, Lightbody estimates that recent deals have been drawing an average of nearly 20 bids each, with buyers varying the size deals they want based on their respective yield requirements. There will be the same number of sellers this year as opposed to last year, but they are likely to be selling more, he added.

In addition to funds, some banks are still in the market to buy agency MSRs, according to Maurer. One package recently drew 19 different buyers, five of which were banks, he said.

“I think we’ll see again banks very selectively jump in at certain times if they do not have capital concerns,” he said.

The mix of players is changing, but the numbers are the same when it comes to nonbanks. Some have been stepping out, but new entrants have been taking their place.

There still is potential for the market to weaken further this year, but whether it will remains to be seen. Several buyers are concerned about the market softening due to Ocwen’s intention to sell, but so far, that hasn’t happened yet, Maurer said.

While concerns materialized over who could take on Ocwen’s massive servicing responsibilities in the event that California regulators made good on their threat to strip the nonbank of its state license, the smaller and more gradual sales Ocwen has planned more recently are far less likely to upset the market. (Ocwen has since settled with the state of California.) Regulatory scrutiny surrounding transfers and increased concern about counterparty risks may not stop deals, but they could slow them.

In the Ginnie Mae MSR market, there also could be some downward pressure on valuations this year and that could be a consideration in trades, according to executives at MorVest Capital.

The FHA’s reduction in its annual mortgage insurance premium by 50 basis points which will likely lead to increase prepayment speeds in 2009-2011 vintages, said David Fleig, MorVest president and chief executive officer, and John Sullivan, its executive vice president and chief financial officer.

There also is another recent change that could have an impact on flow valuations.

Historically, with exception of loans paid off on the first business day of the month, Ginnie servicers could charge borrowers for the entire month and pass that through to the security holder. But under a new rule that’s effective on loans closed after Jan. 20, Ginnie servicers will only be able to charge the borrower up through the date of payoff, a similar practice to conventional mortgages.

Loans in Ginnie pools are required to pass through a full month of interest to security holders, so this will create an interest shortfall for servicers. Based on modeling and historical data, Sullivan estimates that the interest shortfall could depress valuations by roughly 4 to 8 basis points.

These governmental changes have some other benefits for the larger mortgage market in terms of bringing Ginnie’s practices in lines with Fannie and Freddie when it comes to rules for the interest pass-throughs. Also, the lower MIP is advantageous to the mortgage market as it is an opportunity for originators to refinance loans, which minimizes credit risk.

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