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Market speculation that Wells Fargo<\/strong> is contemplating a huge bulk sale<\/a> of mortgage servicing rights (MSRs) may well be a case of a rumor that is all hat and no cattle. Or it could signal a future MSR-market stampede.<\/p>\n To date, no Wells Fargo bulk MSR public offering has surfaced, market observers say. That doesn\u2019t rule out that the banking behemoth might still have a such a deal in the works, however.<\/p>\n Wells Fargo officials have not commented on the rumors, so speculation is likely to persist over whether the lending giant is about to launch a potentially market-disrupting MSR offering.<\/p>\n One market source, asking not to be named, said that the package<\/a> could potentially be up to $250 billion in all-agency MSRs across two mega offerings \u2014 as much as $150 billion in one Fannie Mae<\/strong> and Freddie Mac<\/strong> MSR asset deal, followed by a $100 billion Ginnie Mae<\/strong> MSR offering. Absent hard proof, that potential move by the lender is still in the arena of rumor at this point, but perceptions do affect buyer and seller choices in the market. <\/p>\n Fueling the rumor in this case is Wells Fargo\u2019s recently announced plans to reduce its MSR portfolio, valued on its books at $9.3 billion<\/a> as of the end of 2022, U.S. Security and Exchange Commission<\/strong> (SEC) filings show. <\/p>\n When something like this comes up [rumors of a big market transaction], that immediately makes its way to two or three people, and mortgage traders tend to have loose lips, so secrets don’t last very long.<\/p>\n Ben Hunsaker, a portfolio manager at Beach Point Capital Management<\/cite><\/p><\/blockquote>\n<\/figure>\n \u201cThe fact that we’ll be originating a lot less [mortgages] will certainly mean that over time, the MSR and the overall servicing book will come down very naturally based upon that, over a fairly long period of time,\u201d said Wells Fargo\u2019s CEO, Charles Scharf, in a recent earnings call<\/a> with analysts. \u201cBut we’ll also look for intelligent and economic ways to reduce the complexity and the size of our servicing book between now and then. And if those present themselves, we’ll certainly be interested in doing that.\u201d<\/p>\n If Scharf is to be believed, and Wells Fargo intends to \u201creduce\u201d the size of its vast MSR portfolio, the options are limited. As of the start of this year, Wells Fargo\u2019s all-agency MSR portfolio included some $608 billion in loans serviced based the unpaid principal balance, or 7.3% of the entire $8.4 trillion all-agency MSR market, according to mortgage-data analytics firm Recursion<\/a><\/strong>. So, one of the few options available to Wells Fargo for scaling down that portfolio, a mega MSR bulk sale, isn\u2019t likely off the table yet.<\/p>\n “When something like this comes up [rumors of a big market transaction], that immediately makes its way to two or three people, and mortgage traders tend to have loose lips, so secrets don’t last very long,\u201d said Ben Hunsaker, a portfolio manager focused on securitized credit for California-based Beach Point Capital Management<\/strong>. \u201cSometimes they [the rumors] are right. But sometimes they’re just rumors.”<\/p>\n Such a bulk sale, market experts say, if it were to take place, could be handled through a public MSR auction or via private direct transaction. In addition, the MSR offerings could be packaged in various ways, including as several mega MSR transactions appealing to a few huge buyers, or through a series of much smaller offerings appealing to a broader based of smaller buyers \u2014 and likely spread out over the course of months or even years. <\/p>\n Wells Fargo also could simply allow the MSRs to run off its books as the loans being serviced expire. That process, however, would take years. <\/p>\n Well Fargo\u2019s all-agency MSR portfolio decreased from $648.4 billion as of end of 2021 to $608.2B as of first week of January 2023, Recursion\u2019s data shows. A large part of that reduction in MSR assets was due to mortgage prepayments (usually the result of refinancing). <\/p>\n Those prepayments registered at $294.3 billion in 2020 but declined to $67.8 billion in 2022 \u2014 which was marked by major run-up in interest rates. Wells did not engage in any significant MSR sales\/transfers over the past three years, Recursion\u2019s data shows.<\/p>\n The main dynamic is the companies that sat out the second half of 2022 because they already reached their capital [limits] dedicated to purchasing MSRs \u2026 they are coming back, so you’re seeing more buyers now.<\/p>\n Azad Rafat, senior director of MSR services at Mortgage Capital Trading<\/cite><\/p><\/blockquote>\n<\/figure>\n If prepayments continue at the lower volume seen in 2022 \u2014 and Wells Fargo has a huge legacy MSR portfolio, including a high volume of lower-rate loans \u2014 then it could take several years or more to wind down its all-agency portfolio in any significant way via attrition, assuming interest rates don\u2019t retreat dramatically and fuel a refinancing boom and wave of loan prepayments.<\/p>\n Simply scaling back future MSR servicing and allowing existing MSRs to run off the balance sheet, then, seems a highly risky strategy for the bank. Several market advisors and traders said pricing in the MSR market is currently healthy, though well off its peak last June \u2014 and potentially under downward pressure moving forward. MSR values are highly sensitive to interest rates \u2014 with MSR pricing tending to decrease as rates decline.<\/p>\n “In an interest-rate environment where we’ve had elevated rates, and [loan]prepayments have slowed, it makes servicing more attractive,” explained Roelof Slump, managing director of structured-finance operational risk at Fitch Ratings<\/strong>. “I think, just in general, it’s perceived that now’s a good time to market servicing and, although rates are off their high, and there’s been a lot of focus around where prepayments are going to be headed, the valuation of that servicing strip still seems pretty attractive.”<\/p>\n MSR values also are impacted by inflation, as that increases the labor and administrative costs related to servicing portfolios. As a result, Wells Fargo could be leaving money on the table if it relies solely on a run-off strategy and fails to capitalize on the current relatively strong MSR market-pricing conditions.<\/p>\n \u201cPricing-wise [with MSRs] we really don’t know for sure where it’s going to head, but so far prices have been holding up and, if the market becomes active, with more buyers bidding, we probably will see some appreciation in value,\u201d said Azad Rafat, senior director of MSR services at California-based Mortgage Capital Trading<\/strong>(MCT). \u201cBut again, that depends on whether there is a recession that everybody talks about and inflation. <\/p>\n \u201cThe main dynamic is the companies that sat out the second half of 2022 because they already reached their capital [limits] dedicated to purchasing MSRs \u2026 they are coming back, so you’re seeing more buyers now. We are anticipating a high-volume market, especially in Q1 and Q2 [of 2023].\u201d<\/p>\n Rafat added that the bulk MSR sale prices used to come in at up to a 5.5 multiple during the peak of the market last year \u201cand currently they are in the 4 to 4.5 range, or about 1 multiple lower than the peak.\u201d A multiple is a measure of the price of an MSR loan pool.<\/p>\n Bearing in mind that what goes up must come down on the interest rate front, Beach Point is treating MSR values as \u201cpotentially vulnerable to 15% to 20% downside risk longer term,\u201d Hunsaker said.<\/p>\n \u201cYou have to be wary from here, if you think [there will be] very high interest rates forever, and a very low [loan] prepayment propensity for perpetuity,\u201d he added. \u201c\u2026We know that some … hedge funds have been out there for the last three or four months trying to raise discreet capital vehicles to capitalize on what they expect to be MSR dislocations.\u201d<\/p>\n Given existing and projected MSR pricing dynamics and other factors, Hunsaker said it makes some sense for Wells Fargo, and possibly other banks, to at least explore bulk MSR asset sales because the money raised from such transactions can be invested elsewhere for a \u201cmuch better ROE [return on equity] for that gross asset utilization.\u201d <\/p>\n \u201cIt’s an easy way for them to make tactical asset allocations to better risk-weighted assets and grow the balance sheet in ways that they couldn’t otherwise,\u201d Hunsaker added.<\/p>\n In the case of Wells Fargo, there also are some regulatory challenges the bank is now facing with respect to its MSR portfolio, according to Hunsaker. The Office of the Comptroller of the Currency<\/strong> fined Wells Fargo $250 million<\/a> in the fall of 2021 for failing to timely and adequately upgrade its compliance risk-management systems. The regulator also limited the bank\u2019s ability to acquire future MSRs<\/a> from other companies, along with imposing other restrictions, \u201cuntil existing problems in mortgage servicing are adequately addressed.\u201d<\/p>\n \u201cIf you’re Wells \u2026 this [a large bulk MSR sale or series of them] could be an easy way for them to make tactical asset allocations to [invest in] better risk-weighted assets and grow the balance sheet in ways that they couldn’t otherwise,\u201d Hunsaker said. \u201c\u2026 The big U.S. banks [in this high-inflation\/high-rate economy] really have to think about [strengthening] their Tier 1 capital [ratios].<\/p>\n \u201c\u2026 I also think they [Wells Fargo] probably has a pretty high political impetus [because of regulatory pressures<\/a>] to shrink their asset base in the first place and, secondarily, shrink their asset base in areas that might get them in trouble<\/a>, with their servicing book being first and forefront among that.\u201d<\/p>\n A recent report by investment bank Keefe, Bruyette & Woods<\/strong> (KBW) focused on the potential for Wells Fargo to pursue a huge bulk sale of MSR assets involving up to $150 billion in Fannie and Freddie MSRs and some $100 billion in Ginnie MSRs. The report states that it would require a buyer, such as a publicly traded nonbank or real estate investment trust (REIT), to have an estimated \u201c$3 billion (or so) of capital.\u201d<\/p>\n \u201cIn terms of available liquidity, PFSI (Pennymac<\/a><\/strong>) has $2.8 billion, COOP (Mr. Cooper<\/strong>) has $2.3 billion, RITM (Rithm Capital\/New Residential<\/strong>) has $1.8 billion, and NLY (REIT Annaly Capital Management<\/strong>) has $4.3 billion of cash and unencumbered agency MBS,\u201d the KBW report states. \u201cWith that being said, we do not think any company would be comfortable parting with [an estimated] $1 billion (or more) of capital, given the macroeconomic uncertainty. <\/p>\n \u201cWe think the size of [such a potential] offerings could potentially bring new capital to the [MSR] space,\u201d the KBW report adds. \u201cWe think this could come in the form of secondary offerings, private funds, or potentially IPOs but that is less likely given the somewhat limited size.\u201d<\/p>\n If Wells Fargo shakes up this [MSR] market… it could be really problematic for the smaller regional conforming-mortgage originators that just barely survived 2022 and are now coming into what would otherwise be a decent gain-on-sale [MSR] market, so they might get squeezed again.<\/p>\n Ben Hunsaker, portfolio manager at Beach Point Capital Management<\/strong><\/cite><\/p><\/blockquote>\n<\/figure>\n If Wells Fargo did bring to market such a huge package of MSR offerings, Rafat said other MSR deals \u201cbelow $10 billion will not materially get impacted.\u201d <\/p>\n \u201cThe $20 billion to $30 billion [MSR bulk-portfolio] deals, if there is such a transaction, may get impacted,\u201d he said, \u201cbut the typical buyer of such a large transaction is not going to be the common buyers that we currently see in the market.\u201d<\/p>\n The KBW report also notes that it\u2019s possible Wells Fargo would break up the MSR packages into \u201csmaller ones, which may make participation from public companies more likely.\u201d<\/p>\n Hunsaker added, \u201cIf Wells Fargo shakes up this [MSR] market\u201d in that way, \u201cit could be really problematic for the smaller regional conforming-mortgage originators that just barely survived 2022 and are now coming into what would otherwise be a decent gain-on-sale [MSR] market, so they might get squeezed again.\u201d<\/p>\n With respect to any mega Ginnie Mae MSR bulk sale, KBW said the universe of potential buyers is smaller than for conventional MSRs because the number of active Ginnie MSR servicers is much smaller. Ginnie Mae backs securities issued against government-insured loans originate through programs such as the Federal Housing Administration<\/strong>. Such mortgages tend to have higher delinquency rates, resulting in higher servicing costs and more administrative hurdles.<\/p>\n \u201cWe think that a sale of this size [a potential $100 billion Ginnie MSR bulk sale] could warrant scrutiny from regulators,\u201d the KBW report states. \u201c\u2026 From the perspective of the regulators, there would likely be a lot of emphasis on the buyer’s operations, capital levels and track record.<\/p>\n \u201c\u2026 Worth noting, excluding [Pennymac] \u2014 who doesn’t usually buy in the bulk market \u2014 none of our coverage universe [of public companies] is very active in Ginnie Mae servicing,\u201d the KBW report adds. \u201cOther than [Pennymac], the two largest Ginnie Mae servicers are private companies, Lakeview\/Bayview Loan Servicing<\/strong> and Freedom Mortgage<\/strong>.\u201d<\/p>\n The KBW report also notes that there have been mega MSR bulk sales by banks in the past, specifically in the wake of the global financial crisis, when many lenders were struggling to shed \u201ctoxic\u201d assets. For example, in 2013, Nationstar Mortgage<\/strong> (since rebranded Mr. Cooper) acquired $215 billion MSR assets<\/a> from Bank of America. <\/strong><\/p>\n Rafat\u2019s firm, MCT, is telling clients that over the next six months, if they have a sense of urgency about pulling the trigger on a bulk MSR offering because of their capital position, then going to market sooner is better than later \u2014 given the anticipated direction of future MSR pricing and the speculation surrounding a potential market-disrupting MSR offering from lending giant Wells Fargo.<\/p>\n \u201cWe have to base our results on actual facts,\u201d Rafat stressed, \u201cso, until a deal materializes, we really cannot take it into consideration. <\/p>\n \u201cHowever, clients do ask those questions,\u201d he added. \u201cAnd what we tell them is, you know, \u2018These are the potential risks, but there could be advantages as well,\u2019 [depending on the client and the contemplated MSR offering involved].<\/p>\n \u201cBut without seeing the [Wells Fargo MSR] deal go through and having something in hand, we really cannot make any assumptions related to the valuation.\u201d<\/p>\n It\u2019s also possible that news of any potential mega Wells Fargo MSR transaction would remain under wraps until the lender files a notice of the transaction with the SEC well after the deal has closed \u2014 if it is carried out as a private direct transaction.<\/p>\n “There is always a transaction going on somewhere \u2014 banks, nonbanks, investment companies,” Rafat said. “You do not hear about those transactions, and there’s a lot of investment firms that constantly buy and trade under the radar. <\/p>\n “And obviously, with the higher interest rates we’re experiencing right now, banks would always look for higher yields. The yield on the current MSR asset is around 10% to 11%. They could probably generate more by freeing up this capital, [depending on] the bank’s circumstance.”<\/p>\n\n
Wells Fargo & market dynamics<\/h2>\n
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Capital commitment<\/h2>\n
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