The mortgage-servicing rights (MSR) market remains robust as we turn the corner into 2024, and though it is expected to slightly underperform 2023, the market is still projected to notch healthy trading volumes in 2024 — hovering near the $1 trillion mark for the fourth year in a row, market observers forecast.
But the MSR market also appears to be in the midst of a rebalancing act marked by the growth of third-party private capital and an overall consolidation of market players, according to some industry experts.
For at least the past five years, according to market data, the MSR sector has been increasingly dominated by nonbanks — with a good portion of the loan balance they service at historically low legacy rates.
Mortgage-data analytics firm Recursion reports that in of 2019 nonbanks held agency MSRs totaling $3.445 trillion, based on the outstanding balance of loans serviced. As of January 2024, total agency MSRs held by nonbanks totaled $5.882 trillion — a $2.437 trillion increase, much of it acquired and retained during the boom origination years in 2020 and 2021.
MSR holdings for banks over same period remained essentially flat, however, according to Recursion’s data — at $2.773 trillion in 2019 versus $2.747 trillion as of January 2024, again based on the outstanding balance of loans serviced.
Among the major stories in 2023 was Wells Fargo’s efforts to downsize its mortgage footprint, including its MSR portfolio. The bank’s third-party servicing portfolio (excluding loans subserviced for others) shrank by more than $100 billion last year, going from roughly $667 billion at the start of 2023 to $560 billion at year’s end, according to its financial filings.
Well’s MSR portfolio was shrinking even as the MSR market continues to expand, however. In 2019, total agency MSRs outstanding, based on agency loan balances serviced, stood at $6.219 trillion, Recursion data shows. As of January 2024, that figure had jumped to $8.636 trillion.
Repositioning
Going forward, however, if 30-year fixed interest rates continue to hover in the 6% range over the course of this year, new loan originations are expected to remain muted. Redfin reports that nearly 79% of homeowners now have rates under 5%.
Market observers say if rates do stay higher for longer, that will continue to build pressure for many nonbanks to use MSRs as a liquidity tool in managing their balance sheets — which will promote healthy MSR trading volume.
“[Since Covid], the IMB [independent mortgage bank] group has retained a lot of MSRs that they had not retained historically as a group,” said Nick Smith, founder, managing partner and CEO of private-equity firm Rice Park Capital Management (RPCM), an active MSR buyer. “And they’ve also been huge sellers of servicing over the last three years [often to each other].”
The volume of MSR trading over the past three years has hovered around $1 trillion per year, nearly twice the volume of trading from 2015 to 2020, when the average was around $535 billion each year, Smith points out.
“There are some [smaller] companies that have sold a lot of their MSRs and now have to turn that corner to real profitability, and they don’t have that piggybank to draw from,” said Charley Clark, a senior vice president and mortgage warehouse finance executive at EverBank (formerly known as TIAA Bank). “The big guys [large IMBs] not only have that [access to capital], but they have strong cash positions as well.
“Now they [the struggling IMBs] have to make money.”
Clarke, too, notes that there has been “a repositioning of MSRs” in the market during the current economic cycle — pointing to Wells Fargo’s mortgage-footprint downsizing.
“I think we’re probably going to end up with more consolidation,” RPCM’s Smith added. “The total number of firms [IMBs and banks] after this cycle of right-sizing is probably going to be lower.
“I think the largest firms are going to get bigger, so they’re going to have a bigger share of the market.”
He notes that the biggest sellers of MSRs in 2023 were United Wholesale Mortgage (UWM) and Rocket Mortgage.
“My perception is that they are really trying to hold the line on market share, and the way they funded that is through selling a lot of MSRs,” Smith said.
The largest buyers of MSRs last year, he added, were Mr. Cooper and Lakeview Loan Servicing.
“Those two [Mr. Cooper and Lakeview] were each like three times the next biggest buyers [of MSRs in 2023], so those are the big growers,” Smith said.
A January report by Mortgage Capital Trading (MCT) indicates that MSR pricing is holding up in the market, but the dollar size of MSR pools is expected to erode some in the year ahead due to principal paydowns on low-rate legacy loans as well as the trend of many lenders retaining less servicing on new production.
“As borrowers make their regular payments [on 2020 to 2022 vintage loans], the natural principal payments make up approximately 40% to 60% of total principal balance runoff, which includes portfolio payoffs,” the MCT report states, adding that many lenders also “are currently retaining only about 20% to 30% of their production, which barely covers the principal balance that ran off.”
“This is the primary driver that is causing the dollar value of portfolios to continue to decline while the basis points values remain level,” the report concludes.
Adding to that math of reduction is the fact that new mortgage production is down considerably from its peak in 2021 — and hence new MSR volume is down as well.
Tom Piercy, chief growth officer at Incenter Capital Advisors (previously Incenter Mortgage Advisors) anticipates that trading volume in 2024 also is expected to be impacted, in part, by MSR sales linked to merger and acquisition (M&A) activity in the lending sector.
“Unless there’s some type of pickup in the forecast for originations, I think you’re going to see still an active M&A market through 2024,” Piercy said in the first of two recent interviews with him. “Many shops will probably look to become part of a larger, more financially stable platform.”
Private Capital
In addition to the depository institutions and IMBs working the ropes as MSR buyers and sellers, there is yet another source of growing MSR demand and capital investment that has been helping to fuel the market’s growth in recent years — and is expected to continue fueling MSR market trading in the year ahead.
“One thing that’s very clear is the group that’s growing is primarily raising third-party private capital [to fund MSR purchases], so firms like us [RPCM] or Onslow Bay Financial [owned by Annaly Capital Management] and more,” Smith said. “So, the growing group is investment firms, and a majority of them are raising third-party private capital to fund that growth.”
These Investor groups typically partner with mortgage companies or own a mortgage company subsidiary and/or work through a network of subservicers with respect to managing the MSR assets they acquire. For example, RPCM subsidiary Nexus Nova owns servicing rights but uses a network of subservicers to service the loans.
“The IMBs that are pure originators, many are still losing money, and as a group, they’ve got large MSR holdings, and they’re continuing to sell those,” Smith said, adding that those IMBs, “still have a fair amount legacy product that has a low coupon.”
As interest rates trend downward this year —assuming the Federal Reserve backs off its monetary tightening policies — MSRs pegged to loans with current coupons at or “near the money” are expected to see values slip because loan-prepayment speeds will heat up, market observers explain.
The MSRs on the low-coupon legacy mortgages, many with rates as low as 3%, however, are expected to remain largely immune from the value pressures prompted by anticipated rate drops over the next year, and they generally will command better pricing.
“The private-capital category continues to grow as MSRs continue to become a maturing asset class,” Smith explained. “And so we [RPCM] and many others in our category are raising capital and intend to be kind of permanent participants in this market.
“I think that’s a trend that’s likely to continue in 2024.”
Mike Carnes, managing director of the MSR valuation group at Mortgage Industry Advisory Corp. (MIAC), agrees that “private money has been a big player, a growing player in the sector,”
“It’s incredible how much private money is out there that wants to invest in this asset … and is trying to take advantage of those opportunities while those opportunities exist,” he added.
Q4 deal lull
Incenter’s Piercy said the MSR market did slow down a bit in the fourth quarter of last year as interest rates started to decline, adding that “ those last 10 weeks, eight weeks of the [fourth] quarter [last year] absolutely had an impact on pricing and bidding.”
As interest rates drop, the threat of loan prepayments increases and the returns MSR owners can earn on escrow holdings decline — both of which have a negative impact on MSR pricing.
“ I think that [the rate dip] caused some people to take a step back and not offer what they were looking to do [on the MSR side],” Piercy said. “And then I think some of the bidders having to hit the pause button [in Q4] while they were doing some capital raise also was impactful.
“As I’m talking to you today, we’ve gotten through that, and I don’t have any concerns moving into these next six months at this stage.”
Piercy added that as rates decline, assuming that’s the case this year, it’s not all a negative for MRS trading. He said some lenders will find value in acquiring MSRs in a declining-rate environment because of the “recapture” opportunity it presents for refinancing loans.
“We’ve had success when these types of cycles hit in the past with particularly those servicers who are successful at recapture,” he said. “If the rates start dropping, now I can start picking up a little bit of gain on sale through my recapture programs.”
New capital rules
A survey of three advisory firms working in the MSR sector seems to bear out Piercy’s assessment that the market has rebounded from the fourth-quarter 2024 dip in activity.
A total of eight bulk offerings of agency MSRs are currently in play among the three advisory firms — Incenter, MIAC and Prestwick Mortgage Group, which typically handles smaller MSR offerings under $1 billion, often in conjunction with partner MCT.
Those eight MSR offerings combined total $14.2 billion based on outstanding loan balances — with at least six of the deals involving IMBs as sellers and six involving average coupons under 3.6% (legacy loans). The largest of the pending deals is a $9.42 billion Fannie Mae/Freddie Mac offering from Incenter Capital Advisors, which also has another $50 billion in MSR deals in various stages of play in the pipeline, Piercy said, with most of those pending deals being privately negotiated.
Piercy added that nonbank holders of Ginnie Mae MSRs also have to contend with the new risk-based capital rules that are slated to take effect at year’s end. He anticipates that the stricter capital rules could amplify MSR trading volume this year — along with the continuing consolidation of the IMB industry via mergers and acquisitions.
“And now we’ve got a capital-increase requirement, so it’s going to cause, I think, people to definitely investigate, assess and decide [how to deal with the change],” Piercy said. “We’re already seeing some [lenders] that are feeling as it’s probably better just to sell the asset.
“We anticipate there’s going to be a fairly steady flow of that inventory for the Ginnie MSRs through most of 2024. … That’s probably one of our biggest areas of concentration today.”
Carnes agrees with Piercy’s assessment.
“The new GInnie capital rules kicking in at the end of the year,” he said, “are creating pressure on those [Ginnie MSR] portfolios in terms of both pricing and also probably people wanting to get out from under them if they don’t want to deal with that.”
Rankings
The MSR market will be coping with multiple variables affecting deal sizes and values in the year ahead — among which are the direction of interest rates, new capital rules and the ongoing consolidation of the IMB sector. What is clear already, however, is that there appears to be a repositioning of players in the MSR market underway.
That shift is revealed, in part, in reports prepared by Recursion that rank the top holders of Freddie Mac, Fannie Mae and Ginnie Mae MSRs combined as of June 2023 and again as of January 2024. The rankings include market share (%) and MSR portfolio size — based on outstanding loan balance ($).
As of January 2024
1. Lakeview Loan Servicing: 7.4%, $642,233;
2. Pennymac: 6.8%, $585,500
3. JP Morgan: 6.6%, $566,005
4. Nationstar [Mr. Cooper]: 5.9%, $513,010
5. Wells Fargo: 5.8%, $502,662
6. Quicken Loans [Rocket Mortgage]: 5.3%, $460,703
7. Freedom Mortgage: 5.2%, $452,753
8. Newrez: 5.2%, $450,135
9. UWM: 3.2%, $274,119
10. US Bank: 2.5%, $218,014
As of June 2023
1. Wells Fargo: 7.0%, $589,518
2. Pennymac: 6.5%, $550,152
3. Lakeview Loan Servicing LLC: 6.4%, $538,728
4. JP Morgan: 6.0%, $506,340
5. Quicken Loans [Rocket Mortgage]: 5.6%, $471,860
6. Freedom Mortgage Corp.: 5.4%, $454,998
7. Nationstar [Mr. Cooper]: 4.3%, $364,937
8. Newrez: 4%, $339,676
9. UWM: 3.8%, $319,312
10. US Bank: 2.7%, $225,132
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Opinion: The elephant in the real estate room? Lowballed appraisals
Sports TV personality Stephen A. Smith, speaking on Detroit as the Detroit Lions were in the final four contenders to play in Super Bowl LVIII, described the city as follows: “Detroit. Phenomenal fan base. Great city. It’s been through a lot. The downtown area, big time. The stadium, big time. But you go to the outskirts of the Detroit area and it looks like a damn desert town.”
Although Smith is not quite wrong, he’s not right, either.
What do I mean?
The Brookings Institution summed it up well: “Today, downtown Detroit is nearly unrecognizable from previous decades, with new features such as the QLine streetcar system, a renovated Detroit Tigers ballpark, a riverwalk, and Campus Martius Park. Yet as surrounding neighborhoods appreciated in value with increased amenities and services, rising costs pushed out the mostly Black, longtime residents — excluding them from the benefits of development.”
Have you ever wondered how the Motor City, which was once a destination for financial upward mobility, could be so cavalierly called a “damn desert town”?
There are several factors to cite but I want to highlight a key area that may be taken for granted — that not everyone receives a fair home appraisal.
Stifled
The Fair Housing Center of Metropolitan Detroit shared that loan denial rates in Detroit, due to the appraised value of a home (a.k.a. the collateral) being insufficient, accounts for approximately 3x the national rate (HDMA 2022 data). This data for Detroit is twice as high as the rest of the state of Michigan. Yikes!
What’s going on in Detroit, then? Let’s go back in time before looking to the future.
To begin, if you did not know, a literal wall was built (with parts of it still standing) to divide white homeowners from Black residents along portions of 8 Mile (yes, Eminem’s track is titled after the notorious street). The “wailing wall” helped to ensure that any non-Black, would-be homeowners had a better chance at not being “redlined” simply because of the neighborhood.
“Redlining,” although illegal since 1968, still happens.
As a refresher, “redlining” means that no matter the features or amenities that a home provides, if the home is in a neighborhood with Black residents (homeowners or renters), traditional (and more affordable) lending and insurance would be denied — although a few sub-prime options tend to circle these communities like sharks. In other instances, sometimes Mexican, Jewish, South Italian, Polish or Greek neighborhoods (based on Hoyt’s Hierarchy) could also be downrated to “yellow” from the esteemed “green” rating (with “green” signifying open access and opportunity to lending and insurance products).
Here’s a summary of how “redlining” flows from its inception during the New Deal until today:
Ultimately, this is a double-edged sword. Homeowners do not experience the exponential power of appreciation nor capital gains, meaning real estate is not the same long-term, wealth-building investment vehicle for everyone. Nor do these homeowners have the same access to local services.
Sidebar: My parents have lived in Detroit’s Palmer Woods (which is between 7 Mile and 8 Mile) since I was a tween. While home shopping in the 1990s, my parents (to this day) remember reading the racially restrictive covenants for the “exclusive” enclave that banned any Black person from living there. For the sake of length, I’m skipping the history lesson on racially restrictive covenants, but I would be remiss to not mention that such covenants were also a contributing factor.
Shunned
Let’s be honest, shows like “Million Dollar Listing ___” (insert your favorite place) are not just fun TV. They represent an aspirational lifestyle for many. Having been a real estate coach and instructor for over a decade, I have met learners that are community supporters (I believe this has been the majority) but I have also met learners that only care about their “bag” — enriching themselves even if it means a community goes up in flames.
Sometimes this pursuit is alleged to not be intentional, as in the digital “redlining” settlement that Redfin faced. Redfin affirmed no evil, discriminatory intentions in setting a floor to the price point of homes they would service. Yet, the very act of having a floor limit meant that certain neighborhoods — and their residents, despite other qualifications — would not have access to their services. Limited services means limited options, access and opportunities. That is anathema to the spirit of fair housing (and lending).
Approximately 20 years ago, as a new resident to Georgia still learning the ins and outs of that market, my first real estate broker, whose office was in the “exclusive” north Atlanta/Sandy Springs area said, “I don’t want to sell homes in Stone Mountain or on the south side of Atlanta.” She said a lot without explicitly anything. Her office later had an infraction by the real estate commission and had to take extensive training on fair housing (surprise, surprise).
Okay, but that was 20 years ago. A lot has changed when it comes to attitudes, right?
Recently, as a Realtor, I reached out to my network to help sell my grandmother’s Detroit home. I had an agent that lived in the city say, “Oh, I only work in the suburbs.” I knew what he was saying in between the lines: “I want a higher price point so I can make a higher commission.”
I repeat: Lowballed values do not just mean the homeowner’s equity is diminished, it also means that homeowners are excluded from numerous resources and opportunities that are included by default elsewhere.
Support
Detroit has real estate like no other place in the world — we can see homes that have been designed by Frank Lloyd Wright and where folks like Aretha Franklin and Francis Ford Coppola had their humble beginnings.
How can we help Detroit and similar places? As Coleman A. Young, Detroit’s 70th mayor said, “We must take the profit out of prejudice.”
I am encouraged by the examples in New Jersey and Maryland of recent initiatives to improve fair appraisals. I’m advocating for more locales (from Detroit to Tacoma to Boston) to adopt similar fair appraisal drives and policies. I hope you will join me.
Lee Davenport, PhD, is a real estate coach/trainer and blogger who trains real estate agents and brokerages on how to work smarter with technology.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Dr. Lee Davenport at lee@learnwithdrlee.com.
To contact the editor responsible for this story:
Tracey Velt at tracey@hwmedia.com.
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Short-Term Rental Regulations Keep Getting Stricter—Here Are Three Ways You Can Navigate Them This Year
Drawing from my background in regulatory compliance for global financial institutions, I have developed an appreciation for the intent of regulations that strive to safeguard public interests.
Regulations are not limited to finance—as you may be aware, short-term rental (STR) laws are a hot topic. As cities aim to refine STR laws to suit their unique community needs, the landscape and laws continue to evolve.
In this article, I will share my experiences and offer actionable advice for navigating these changing regulatory environments.
1. Maintain Flexibility in Your Income Strategy
STR laws are not just set at the city level but also by homeowners associations (HOAs). This was a key lesson from my early foray into STRs.
My first STR was in an HOA community. I was all set up and thriving—and then the HOA unexpectedly updated their rules, prohibiting leases of less than 12 months. This led me to adapt quickly, transitioning my STR into a long-term rental that was still profitable.
This shift highlighted for me the critical need for flexibility in real estate strategies. When analyzing deals, it’s important to consider properties that can adapt to both STR and long-term rental models.
While finding a property that can profitably function as both an STR and a long-term rental isn’t always feasible, it’s essential to assess your willingness to take on certain levels of risk. In my experience, I lean toward STRs located outside of HOA communities to avoid the risk associated with potential bylaw changes.
2. Educating Homeowners: The Key to Harmonious STR Hosting and Equitable Lawmaking
Homeowners’ concerns about STRs are not limited to immediate issues like noise and parking disturbances. There’s also a growing concern regarding the impact of STRs on the broader community, such as potentially increasing rental rates and reducing housing availability for locals.
These concerns, whether widespread or localized, deserve serious attention and dialogue. Effective management of these issues requires STR hosts to engage proactively and thoughtfully with their communities. Open communication with neighbors is crucial, not just to address immediate nuisances but also to participate in discussions about the economic and social implications of STRs.
Working with homeowners and the community, STR hosts can help develop balanced and fair STR regulations.
3. Strategically Adapting Your STR Portfolio to New Laws
Enforcement of STR laws has been known to vary significantly by city. This variability puts the onus on the STR owner to decide how you choose to operate with new information and regulations. Adhering to new laws as soon as they are enacted is often considered the safest, most responsible approach for any business to ensure compliance and minimize legal and financial risks.
That being said, when faced with new laws, you have two primary options: adapt immediately to the changes or take a “wait-and-see” approach if you anticipate further amendments. One example of the latter is if new laws come out and you think your city will add a grandfather clause in the next iteration.
Deciding whether to comply immediately or to observe for potential evolution in the laws involves assessing both risks and potential benefits. Your decision should align with your risk tolerance, values, and the unique circumstances of your properties.
Final Thoughts
Successful STR management hinges on adaptability and informed decision-making. Staying current with evolving regulations and assessing how they impact your strategy is very important.
By balancing compliance with strategic flexibility, STR owners can navigate the complexities of the market while maintaining profitable, responsible operations.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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DataDigest: National rent price growth normalizes, while Austin rents lose steam
The pandemic-era boom in single-family rental prices is over, according to CoreLogic‘s Single-Family Rent Index.
The index, which analyzes single-family rent price changes nationally and across major metropolitan areas, tracked 13-15% annual growth in rental prices in the first half of 2023, but the index value rose only 2.7% in November, the latest data available.
CoreLogic Principal Economist Molly Boesel told HousingWire the 2022 price boom was largely “a spillover from the for-sale market,” which has been stuck in a prolonged inventory crunch in the present high-mortgage-rate environment. That has kept multifamily and single-family renters from making the jump to home ownership, thereby keeping rental demand high.
The rental and for-sale single-family housing markets mostly move in tandem, though swings in rental prices tend to be more muted, Boesel said.
Year-over-year rent price growth nationally and in most cities is now back within the 2-4% range that persisted for about a decade pre-Covid. Some metros, including Austin and Miami, are even seeing rent prices fall on an annual basis.
Austin is a unique case, Boesel noted. The city’s average rent price rose 30% from early 2020 to mid-2023 as high-earning tech workers moved in, but tens of thousands of multifamily units have since been completed, with tens of thousands more in the pipeline. These shiny new alternatives to single-family rental units, often paired with leasing incentives like a month’s free rent, have sapped single-family demand.
As a result, Austin has experienced five consecutive months of single-family rent price annual declines. While that is an unwelcome trend for Austin’s single-family property managers, the city’s average rent price was still 23% higher in November than it was in February 2020, Boesel noted.
For Boesel, Austin is a unique case that is not indicative of national trends. She expects rental prices nationally to continue to grow 2-4% per year in the near term.
Nationally, multifamily construction has grown at a faster rate than single-family construction. That helps explain why single-family rents are no longer growing at 13-15%, but is not a cause for concern that cities across the country are about to resemble Austin’s market, Boesel believes.
Multifamily completions in December were 47% higher than the 2019 average, according to the latest data available from the U.S. Census Bureau and the Department of Housing and Urban Development. Single-family completions, by contrast, were 17% higher than the 2019 average.
However, single-family builders have continued to start and authorize more units, while multifamily builders have stepped on the brakes. Multifamily permits in December were 8% below the 2019 average, while single-family permits were 16% above the 2019 average.
In addition to multifamily and single-family completions, an increase in homes listed for sale should mute rent price growth and keep it within the 2-4% annual growth rate window, Boesel added. However, that depends in large part on how quickly and steeply mortgage rates fall. Boesel doesn’t anticipate a significant increase in inventories until mortgage rates – currently around 6.7% – reach 5.5%.
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Aging in place through home-based care is a leading outcome for seniors
While individual needs and health issues will primarily dictate how a person spends their final years, a new study shows that home-based care is a leading outcome for older Americans. This conclusion comes from a new study by researchers at Rutgers University in New Jersey. Hospice News first reported the findings.
“The aim of this study was to determine the trajectories for place of care in each quarter during the last three years of life among Medicare beneficiaries and the factors associated with these trajectories,” the researchers explained. “A retrospective cohort was assembled from Medicare beneficiaries who died in 2018, and a 10% random sample of the cohort was analyzed.”
The final results were ultimately sorted into three predominant “clusters,” they explained, including home care, skilled home care and institutional care. The far-and-away preference for the sample was in some type of home-based care, according to the findings.
“Nationally, over half (59%) of Medicare beneficiaries were in the home cluster, one-quarter (27%) were in the skilled home care cluster, and the rest (14%) were in the institutional cluster,” the researchers said. “There were large variations by state in the use of services during the last three years of life.”
Home care without a skilled nursing element was most frequent among Medicare beneficiaries in Alaska (81.5%), Puerto Rico (81.4%), Hawaii (72.9%), Arizona (69.2%) and Oregon (68.9%). They were least frequent among beneficiaries from Massachusetts (47.1%), Louisiana (47.8%), Rhode Island (48.3%), and Connecticut (48.6%).
“Our findings are similar to those reported in a recent prospective cohort study using a representative sample from the National Health and Aging Trends Study (NHATS), which also found that 58% of NHATS participants remained at home and 17% transitioned to or died in an institutional setting,” the Rutgers study found. “Our findings are also consistent with the recent downward trend of deaths in acute care hospitals and upward trend of deaths in home and community settings.”
Still, while the primary preference appears to be aging at home, more information is required to fully understand these preferences, the researchers concluded.
“While the majority of older adults spent their final years at home with minimal use of skilled home care or institutional care until the final months of life, 40% had major health service needs,” they said. “Extended use of skilled home care or institutional care was more frequent among older adults living with multiple chronic conditions, including dementia.”
Future research that aims to understand “the health care systems and policy factors that influence place of care trajectories” could help advance refinement of the care experience, health of the population and associated care costs, they added.
Aging-in-place preferences among older Americans are well documented, and the drivers of these preferences have also been subjects of recent discussion. Long-term care is also an increasingly large priority for older Americans.
The reverse mortgage industry often aims to position its product offerings as conducive to the goals of aging in place. The results of the Rutgers study may shed light on the broader considerations that lead older Americans to seek out certain end-of-life care paths, particularly as the U.S. population grows older more quickly.
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Two Harbors to launch origination channel next quarter
Two Harbors Investment Corp., a New York-based real estate investment trust, announced Tuesday its plan to launch a mortgage origination unit in the second quarter of 2024, less than a year after the company debuted in the servicing business by acquiring RoundPoint Mortgage Servicing Corp. in October 2023.
But don’t expect the firm to compete with big players or grow extensively in originations. The step is part of a defensive strategy to retain customers when mortgage rates drop. Declining rates tend to increase prepayments as borrowers refinance their loans, often away from the existing servicer. This risk reduces the value of mortgage servicing rights (MSR).
Two Harbors’ announcement came on the heels of a reported $444.7 million net loss in the fourth quarter of 2023, compared to a loss of $294 million in the previous quarter, according to filings with the Securities and Exchange Commission (SEC).
The firm’s CEO, Bill Greenberg, told analysts that the company’s focus is to “develop a best-in-class direct-to-consumer originations channel to provide recapture” on the company’s servicing portfolio, which totaled $3 billion as of Dec. 31.
Company executives believe that the weighted average coupon rate of the company’s servicing portfolio — 3.45% in the fourth quarter — signals a low risk of prepayments for now. It gives the company some time to build the origination channel from scratch.
“Despite the decline in mortgage rates over the quarter, our MSR portfolio … still has less than 1% of its balances with 50 basis points or more of rate incentive to refinance, which should keep prepayment rates low,” Two Harbors chief investment officer Nick Letica said in a statement.
“We are long away from serious refinancing activity unless interest rates fall precipitously,” Greenberg stated, which makes the executives believe they “have the time to build the platform that we want.” He says the company did not consider an acquisition because other potential structures were built for different environments or have legacy risks.
Two Harbors has already started to hire managers and team members for the new origination platform, which is expected to begin making loans in the second quarter.
Greenberg explained that with the direct-to-consumer platform, Two Harbors can also offer borrowers second-lien home equity loans and other ancillary products.
“We are not going to be a retail originator,” he said. “We are not going to be someone who’s going to compete with the largest guys out in the world. The point of this thing is really to protect our servicing portfolio, to defend our portfolio, to perform recapture on our portfolio.”
Two Harbors executives also told analysts that the capital investment for the mortgage origination unit will be low, as the intent is not to hold the loans. The company will likely sell them directly to agencies, keep the servicing rights and replace the servicing tasks that otherwise would have evaporated due to lower rates.
In October, the company completed its acquisition of RoundPoint. It has already completed nine of 10 scheduled subservicing transfers. The remaining transaction is expected to occur on Feb. 1, with the final “clear up” transfer of loans planned for early June.
Following the acquisition, according to Two Harbors executives, the company became the eighth largest conventional servicer in the country.
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Angel Oak Mortgage Solutions taps into HELOCs
Atlanta-based nonqualified mortgage (non-QM) lender Angel Oak Mortgage Solutions is tapping into the home equity line of credit (HELOC) market amid elevated equity levels.
Unlike traditional HELOCs that require a homeowner to have at least 20% equity in their home, Angel Oak’s HELOC qualifies borrowers based on trailing 12- or 24-month bank statements and provides a line of credit with no usage restrictions, the lender said.
Angel Oak’s bank-statement HELOC allows qualified, self-employed borrowers to leverage their home equity while maintaining their primary mortgage. Borrowers can qualify for this loan with owner-occupied homes, second homes or investment properties.
“Bringing our new bank statement HELOC product to the market is a testament to our dedication to meeting the evolving needs of borrowers nationwide,” Tom Hutchens, executive vice president of production for Angel Oak Mortgage Solutions, said in a statement.
“The introduction of this product and the growth of our team position our firm to better support the originators and borrowers we serve while scaling our services to align with the momentum in the market.”
Angel Oak’s HELOC product launch comes amid the still high equity levels across the country.
While overall HELOC loan originations by count were down 7% in the third quarter of 2023 as interest rates spiked, the Federal Reserve reported that outstanding balances on HELOCs increased during this period to $349 billion, up $9 billion from the prior quarter.
In addition, Fed data shows that outstanding debt linked to home equity products also increased in the third quarter to $501 billion, up 2.3% from $490 billion in the second quarter.
Angel Oak has originated $9.4 billion in non-QM volume since 2020 and more than $18.6 billion in non-QM loans since the company’s inception in 2013, according to its release.
The non-QM lender expects more growth opportunities in 2024 with the expansion of its team and product offerings. Most recently, Angel Oak brought on six account executives to serve markets including California, Indiana and Rhode Island, the firm announced.
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A repositioning of players in the MSR market is underway
The mortgage-servicing rights (MSR) market remains robust as we turn the corner into 2024, and though it is expected to slightly underperform 2023, the market is still projected to notch healthy trading volumes in 2024 — hovering near the $1 trillion mark for the fourth year in a row, market observers forecast.
But the MSR market also appears to be in the midst of a rebalancing act marked by the growth of third-party private capital and an overall consolidation of market players, according to some industry experts.
For at least the past five years, according to market data, the MSR sector has been increasingly dominated by nonbanks — with a good portion of the loan balance they service at historically low legacy rates.
Mortgage-data analytics firm Recursion reports that in of 2019 nonbanks held agency MSRs totaling $3.445 trillion, based on the outstanding balance of loans serviced. As of January 2024, total agency MSRs held by nonbanks totaled $5.882 trillion — a $2.437 trillion increase, much of it acquired and retained during the boom origination years in 2020 and 2021.
MSR holdings for banks over same period remained essentially flat, however, according to Recursion’s data — at $2.773 trillion in 2019 versus $2.747 trillion as of January 2024, again based on the outstanding balance of loans serviced.
Among the major stories in 2023 was Wells Fargo’s efforts to downsize its mortgage footprint, including its MSR portfolio. The bank’s third-party servicing portfolio (excluding loans subserviced for others) shrank by more than $100 billion last year, going from roughly $667 billion at the start of 2023 to $560 billion at year’s end, according to its financial filings.
Well’s MSR portfolio was shrinking even as the MSR market continues to expand, however. In 2019, total agency MSRs outstanding, based on agency loan balances serviced, stood at $6.219 trillion, Recursion data shows. As of January 2024, that figure had jumped to $8.636 trillion.
Repositioning
Going forward, however, if 30-year fixed interest rates continue to hover in the 6% range over the course of this year, new loan originations are expected to remain muted. Redfin reports that nearly 79% of homeowners now have rates under 5%.
Market observers say if rates do stay higher for longer, that will continue to build pressure for many nonbanks to use MSRs as a liquidity tool in managing their balance sheets — which will promote healthy MSR trading volume.
“[Since Covid], the IMB [independent mortgage bank] group has retained a lot of MSRs that they had not retained historically as a group,” said Nick Smith, founder, managing partner and CEO of private-equity firm Rice Park Capital Management (RPCM), an active MSR buyer. “And they’ve also been huge sellers of servicing over the last three years [often to each other].”
The volume of MSR trading over the past three years has hovered around $1 trillion per year, nearly twice the volume of trading from 2015 to 2020, when the average was around $535 billion each year, Smith points out.
“There are some [smaller] companies that have sold a lot of their MSRs and now have to turn that corner to real profitability, and they don’t have that piggybank to draw from,” said Charley Clark, a senior vice president and mortgage warehouse finance executive at EverBank (formerly known as TIAA Bank). “The big guys [large IMBs] not only have that [access to capital], but they have strong cash positions as well.
“Now they [the struggling IMBs] have to make money.”
Clarke, too, notes that there has been “a repositioning of MSRs” in the market during the current economic cycle — pointing to Wells Fargo’s mortgage-footprint downsizing.
“I think we’re probably going to end up with more consolidation,” RPCM’s Smith added. “The total number of firms [IMBs and banks] after this cycle of right-sizing is probably going to be lower.
“I think the largest firms are going to get bigger, so they’re going to have a bigger share of the market.”
He notes that the biggest sellers of MSRs in 2023 were United Wholesale Mortgage (UWM) and Rocket Mortgage.
“My perception is that they are really trying to hold the line on market share, and the way they funded that is through selling a lot of MSRs,” Smith said.
The largest buyers of MSRs last year, he added, were Mr. Cooper and Lakeview Loan Servicing.
“Those two [Mr. Cooper and Lakeview] were each like three times the next biggest buyers [of MSRs in 2023], so those are the big growers,” Smith said.
A January report by Mortgage Capital Trading (MCT) indicates that MSR pricing is holding up in the market, but the dollar size of MSR pools is expected to erode some in the year ahead due to principal paydowns on low-rate legacy loans as well as the trend of many lenders retaining less servicing on new production.
“As borrowers make their regular payments [on 2020 to 2022 vintage loans], the natural principal payments make up approximately 40% to 60% of total principal balance runoff, which includes portfolio payoffs,” the MCT report states, adding that many lenders also “are currently retaining only about 20% to 30% of their production, which barely covers the principal balance that ran off.”
“This is the primary driver that is causing the dollar value of portfolios to continue to decline while the basis points values remain level,” the report concludes.
Adding to that math of reduction is the fact that new mortgage production is down considerably from its peak in 2021 — and hence new MSR volume is down as well.
Tom Piercy, chief growth officer at Incenter Capital Advisors (previously Incenter Mortgage Advisors) anticipates that trading volume in 2024 also is expected to be impacted, in part, by MSR sales linked to merger and acquisition (M&A) activity in the lending sector.
“Unless there’s some type of pickup in the forecast for originations, I think you’re going to see still an active M&A market through 2024,” Piercy said in the first of two recent interviews with him. “Many shops will probably look to become part of a larger, more financially stable platform.”
Private Capital
In addition to the depository institutions and IMBs working the ropes as MSR buyers and sellers, there is yet another source of growing MSR demand and capital investment that has been helping to fuel the market’s growth in recent years — and is expected to continue fueling MSR market trading in the year ahead.
“One thing that’s very clear is the group that’s growing is primarily raising third-party private capital [to fund MSR purchases], so firms like us [RPCM] or Onslow Bay Financial [owned by Annaly Capital Management] and more,” Smith said. “So, the growing group is investment firms, and a majority of them are raising third-party private capital to fund that growth.”
These Investor groups typically partner with mortgage companies or own a mortgage company subsidiary and/or work through a network of subservicers with respect to managing the MSR assets they acquire. For example, RPCM subsidiary Nexus Nova owns servicing rights but uses a network of subservicers to service the loans.
“The IMBs that are pure originators, many are still losing money, and as a group, they’ve got large MSR holdings, and they’re continuing to sell those,” Smith said, adding that those IMBs, “still have a fair amount legacy product that has a low coupon.”
As interest rates trend downward this year —assuming the Federal Reserve backs off its monetary tightening policies — MSRs pegged to loans with current coupons at or “near the money” are expected to see values slip because loan-prepayment speeds will heat up, market observers explain.
The MSRs on the low-coupon legacy mortgages, many with rates as low as 3%, however, are expected to remain largely immune from the value pressures prompted by anticipated rate drops over the next year, and they generally will command better pricing.
“The private-capital category continues to grow as MSRs continue to become a maturing asset class,” Smith explained. “And so we [RPCM] and many others in our category are raising capital and intend to be kind of permanent participants in this market.
“I think that’s a trend that’s likely to continue in 2024.”
Mike Carnes, managing director of the MSR valuation group at Mortgage Industry Advisory Corp. (MIAC), agrees that “private money has been a big player, a growing player in the sector,”
“It’s incredible how much private money is out there that wants to invest in this asset … and is trying to take advantage of those opportunities while those opportunities exist,” he added.
Q4 deal lull
Incenter’s Piercy said the MSR market did slow down a bit in the fourth quarter of last year as interest rates started to decline, adding that “ those last 10 weeks, eight weeks of the [fourth] quarter [last year] absolutely had an impact on pricing and bidding.”
As interest rates drop, the threat of loan prepayments increases and the returns MSR owners can earn on escrow holdings decline — both of which have a negative impact on MSR pricing.
“ I think that [the rate dip] caused some people to take a step back and not offer what they were looking to do [on the MSR side],” Piercy said. “And then I think some of the bidders having to hit the pause button [in Q4] while they were doing some capital raise also was impactful.
“As I’m talking to you today, we’ve gotten through that, and I don’t have any concerns moving into these next six months at this stage.”
Piercy added that as rates decline, assuming that’s the case this year, it’s not all a negative for MRS trading. He said some lenders will find value in acquiring MSRs in a declining-rate environment because of the “recapture” opportunity it presents for refinancing loans.
“We’ve had success when these types of cycles hit in the past with particularly those servicers who are successful at recapture,” he said. “If the rates start dropping, now I can start picking up a little bit of gain on sale through my recapture programs.”
New capital rules
A survey of three advisory firms working in the MSR sector seems to bear out Piercy’s assessment that the market has rebounded from the fourth-quarter 2024 dip in activity.
A total of eight bulk offerings of agency MSRs are currently in play among the three advisory firms — Incenter, MIAC and Prestwick Mortgage Group, which typically handles smaller MSR offerings under $1 billion, often in conjunction with partner MCT.
Those eight MSR offerings combined total $14.2 billion based on outstanding loan balances — with at least six of the deals involving IMBs as sellers and six involving average coupons under 3.6% (legacy loans). The largest of the pending deals is a $9.42 billion Fannie Mae/Freddie Mac offering from Incenter Capital Advisors, which also has another $50 billion in MSR deals in various stages of play in the pipeline, Piercy said, with most of those pending deals being privately negotiated.
Piercy added that nonbank holders of Ginnie Mae MSRs also have to contend with the new risk-based capital rules that are slated to take effect at year’s end. He anticipates that the stricter capital rules could amplify MSR trading volume this year — along with the continuing consolidation of the IMB industry via mergers and acquisitions.
“And now we’ve got a capital-increase requirement, so it’s going to cause, I think, people to definitely investigate, assess and decide [how to deal with the change],” Piercy said. “We’re already seeing some [lenders] that are feeling as it’s probably better just to sell the asset.
“We anticipate there’s going to be a fairly steady flow of that inventory for the Ginnie MSRs through most of 2024. … That’s probably one of our biggest areas of concentration today.”
Carnes agrees with Piercy’s assessment.
“The new GInnie capital rules kicking in at the end of the year,” he said, “are creating pressure on those [Ginnie MSR] portfolios in terms of both pricing and also probably people wanting to get out from under them if they don’t want to deal with that.”
Rankings
The MSR market will be coping with multiple variables affecting deal sizes and values in the year ahead — among which are the direction of interest rates, new capital rules and the ongoing consolidation of the IMB sector. What is clear already, however, is that there appears to be a repositioning of players in the MSR market underway.
That shift is revealed, in part, in reports prepared by Recursion that rank the top holders of Freddie Mac, Fannie Mae and Ginnie Mae MSRs combined as of June 2023 and again as of January 2024. The rankings include market share (%) and MSR portfolio size — based on outstanding loan balance ($).
As of January 2024
1. Lakeview Loan Servicing: 7.4%, $642,233;
2. Pennymac: 6.8%, $585,500
3. JP Morgan: 6.6%, $566,005
4. Nationstar [Mr. Cooper]: 5.9%, $513,010
5. Wells Fargo: 5.8%, $502,662
6. Quicken Loans [Rocket Mortgage]: 5.3%, $460,703
7. Freedom Mortgage: 5.2%, $452,753
8. Newrez: 5.2%, $450,135
9. UWM: 3.2%, $274,119
10. US Bank: 2.5%, $218,014
As of June 2023
1. Wells Fargo: 7.0%, $589,518
2. Pennymac: 6.5%, $550,152
3. Lakeview Loan Servicing LLC: 6.4%, $538,728
4. JP Morgan: 6.0%, $506,340
5. Quicken Loans [Rocket Mortgage]: 5.6%, $471,860
6. Freedom Mortgage Corp.: 5.4%, $454,998
7. Nationstar [Mr. Cooper]: 4.3%, $364,937
8. Newrez: 4%, $339,676
9. UWM: 3.8%, $319,312
10. US Bank: 2.7%, $225,132
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Mr. Cooper subsidiary to issue $1B in debt
Mr. Cooper Group announced Tuesday that its subsidiary, Nationstar Mortgage Holdings Inc., is issuing $1 billion in senior notes. The resources are expected to repay a portion of the current balance of its mortgage servicing rights (MSR) facilities.
Other mortgage companies have raised debt over the past six months, including Freedom Mortgage, PennyMac Mortgage Investment Trust and Pennymac Financial Services. Analysts believe other companies may follow suit.
Mr. Cooper’s senior notes, issued to qualified investors, mature in 2032 and will bear interest at 7.125% per year, paid semiannually. Mr. Cooper and wholly owned domestic subsidiaries of Nationstar, other than certain excluded subsidiaries, will guarantee the senior notes.
“It is expected that the net proceeds of the offering will be used to repay a portion of the amounts outstanding under Mr. Cooper’s MSR facilities,” the company stated in a news release.
The transaction is expected to close around Feb. 1 since it’s subject to customary closing conditions.
Mr. Cooper, the target of a cyberattack in November, is expected to release its earnings statement on Feb. 9. The company released its preliminary unaudited financial information on Monday, which showed $69 million in pretax income in fourth-quarter 2023, comparing favorably to a $10 million loss in Q4 2022.
Mr. Cooper said its overall pretax “operating” income came in at $155 million in Q4 2023, which excludes $27 million related to the cyber incident.
Regarding its various businesses, pretax income with servicing operations reached $184 million in Q4 2023, compared to $98 million in the final quarter of 2022. Meanwhile, pretax income with loan origination finished at $9 million in Q4 2023, compared to a $14 million loss in Q4 2022.
According to the company, it incurred a $41 million mark-to-market loss on its MSR portfolio in Q4 2023, net of hedge gains. Its servicing portfolio grew to $992 billion in the quarter and is expected to reach $1.1 trillion in first-quarter 2024.
Dallas-based Mr. Cooper reportedly ended the quarter with $2.4 billion in available liquidity and $572 million in unrestricted cash. It also had $1.85 billion in unused lines.
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Here are the top 10 reverse mortgage securities issuers for 2023
Despite looking a bit different at the end of 2023, there were a lot of similarities in the full-year Home Equity Conversion Mortgage (HECM)-backed securities (HMBS) issuance tables when compared to recent years. One thing that is much different compared to 2022, however, is total issuance.
Here are the top 10 HMBS issuers in 2023 as tabulated by New View Advisors, based on publicly available Ginnie Mae data and private sources the firm has access to.
**Guild Mortgage acquired Cherry Creek Mortgage last year, also accounting for a consolidation of data.
Leading players
At the top of the list once again is Finance of America Reverse (FAR), which took nearly 37% of total market share in HMBS issuance last year. While American Advisors Group (AAG) was technically knocked off its perch atop the industry, AAG was acquired by FAR parent Finance of America Companies (FOA), which caused FAR to absorb AAG’s issuance and make this a technical hold on the No. 1 position.
A couple of players are also absent from this year’s list, with the most noteworthy omittance being Reverse Mortgage Funding. RMF saw its HMBS portfolio seized by Ginnie Mae in late 2022, and that portfolio remains one of the largest in the business. Under Ginnie Mae’s control, however, the portfolio has yet to issue any HMBS pools.
“About $301 million of Issuer 42’s portfolio paid off in November, but Issuer 42 still accounts for $18.3 billion, or about 31% of all outstanding HMBS,” New View Advisors said in December, referring to the former RMF portfolio’s designation. “Issuer 42 has not issued any tail pools; we estimate Issuer 42 now has well over a $1 billion uncertificated position, that is, the excess of the portfolio’s HECM asset balance over the balance of its HMBS liability.”
Total HMBS issuance
Ginnie Mae is currently determining its next steps in the HMBS marketplace, including a recent announcement that it will explore an entirely new HMBS product that would be introduced to the market alongside its existing HMBS program. Former Ginnie Mae President Ted Tozer made a similar recommendation last year and lauded the move in an interview with RMD.
From its leading position, FAR issued $2.39 billion for a 36.9% market share, followed by the $1.39 billion issued by Longbridge for a 21.5% market share. Overall, HMBS issuance in 2023 reached $6.485 billion, less than half of the all-time issuance record of $14 billion in 2022.
The top four issuers accounted for roughly 90% of all HMBS issuance in 2023, New View reported.
Looking ahead
While both HECM volume and HMBS issuance ended 2023 on something of a low note, there is not a lot of difference expected from issuance levels in January’s data, which will likely become available late this week.
“December production reflects applications and originations from 2-3 months prior when the expected rate was at or near its highs,” Michael McCully, partner at New View Advisors, said earlier this month. “We don’t expect January to be much different.”
But if the rate environment becomes more favorable and origination volume picks up on the back of a new HECM limit, that could change.
“Expect origination volume to increase if the 10-year treasury stays below 4% and home values remain stable,” McCully said. “The increased maximum claim amount [i.e., the HECM limit] for 2024 should help volume, too.”
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Mortgage rates poised to drop to 5.5% in 2024: Bloomberg
Most economists forecast mortgage rates to decline in 2024, stoking optimism about the housing market.
According to the newest Bloomberg Markets Live Pulse Survey (MLIV Pulse), the rate on the 30-year fixed mortgage will fall to 5.5% by the end of this year. Most forecasts call for rates to bounce within the 6% to 7% range in 2024, marking the first annualized decline after three straight years of gains.
In 2023, elevated mortgage rates froze sales of existing homes, which slid to their lowest pace since 1995. In 2023, only 4.09 million existing homes were sold, according to the National Association of Realtors. High borrowing costs simultaneously pushed rate-sensitive buyers to the sidelines while handcuffing current homeowners to their historically low mortgage rates. High rates further exacerbated the national inventory shortage and contributed to the surge in home prices.
Federal Reserve officials anticipate at least three rate cuts in 2024, according to projections from their December meeting. The Federal Open Market Committee (FOMC) meets again on Tuesday and Wednesday.
On Monday, meanwhile, 97.9% of investors were anticipating the benchmark interest rate to remain the same after the FOMC meeting, according to the CME Group’s FedWatch tool. But 48.6% of investors have priced in a cut of at least a quarter point in March. On the bright side, new listings rose 2.2% compared with a year earlier, according to Redfin data for the four weeks ending Jan. 21.
“The worst is over for the housing market, but a full recovery will be slow in coming,” Mark Zandi, chief economist at Moody’s Analytics, told Bloomberg. “Mortgage rates should continue to trend lower this year.”
With the U.S. economy looking more encouraging in 2024, 57% of the respondents to the Bloomberg MLIV Pulse survey perceive real estate as a more attractive investment than it was last year. About 10% of the respondents think that a decline to a 6% rate for a 30-year fixed mortgage could help grow single-family housing inventory, while 39% feel that a 5% rate would be preferred.
The MLIV Pulse survey is conducted weekly among Bloomberg terminal and online readers. Last week, the survey focused on U.S. consumers and included 236 respondents.
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