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The year ahead for the mortgage-servicing rights market is shaping up to be a lucrative play for investors, lenders and others looking to purchase<\/a> MSR assets.\u00a0<\/p>\n Independent mortgage banks (IMBs) leaning on MSR sales, however, now face a supply-demand imbalance, market observers say. That imbalance favors buyers and is expected to be a drag on MSR pricing that threatens to squeeze margins for already struggling IMBs \u2014 particularly the smaller players, regardless of whether they sell or retain servicing.<\/p>\n Driving home the concern over MSR pricing declines is a recent advisory bulletin<\/a> issued by the Federal Housing Finance Agency <\/strong>(FHFA), which overseas Fannie Mae<\/strong> and Freddie Mac<\/strong>. The bulletin, issued quietly in mid-January, states that \u201calthough seller\/servicers assign values to their MSRs, the enterprises [Fannie and Freddie] should have their own processes to evaluate the reasonableness of seller\/servicer MSR values.\u201d<\/p>\n \u201cSeller\/servicers and other market participants [including independent mortgage banks, or IMBs] may value MSRs based on differing model assumptions, levels of sophistication and strategic objectives,\u201d the FHFA bulletin continues. \u201cThese differences can cause volatile MSR values. <\/p>\n \u201cFor these reasons, the enterprise should not accept MSR valuations provided by seller\/servicers without an independent evaluation.”<\/p>\n Nick Smith, the founder, managing partner and CEO of Minneapolis-based Rice Park Capital Management<\/a><\/strong>, sees the FHFA advisory bulletin as a positive development.<\/p>\n \u201cPeople generally don’t like regulation and don’t like being held to certain standards, but they also don’t like the consequences of crashes, [which] hurt everybody,\u201d said Smith, whose private investment firm is an active MSR portfolio buyer on behalf of institutional investors and others. \u201cInsofar as the regulatory bodies are trying to create more stability and ensure that big players in the MSR market are responsible, stable, and have appropriate capital and liquidity, I think it’s great.\u201d<\/p>\n FHFA in an email response to a HousingWire<\/strong> query about the advisory bulletin offered the following insight:<\/p>\n \u201cThis is the first such advisory bulletin FHFA has issued on this particular topic [MSR values],\u201d FHFA\u2019s email response states. \u201cIn terms of timing, FHFA has a statutory responsibility to ensure the safe and sound operations of its regulated entities. <\/p>\n \u201cAdvisory bulletins describe FHFA\u2019s supervisory expectations for safe and sound operations in particular areas and are used in the agency\u2019s examinations of its regulated entities.\u201d<\/p>\n Smith said the MSR market currently, based on unpaid principal balance (UPB), is about $14 trillion in total size, “which translate into about $200 billion of market value.” He added that the MSR market, according to his firm’s projections, is expected to grow by an additional $1 trillion UPB by 2025.<\/p>\n Rice Park Capital acquired some $30 billion in MSRs [UPB] in 2022, Smith said. The firm is in the process of raising $500 million from investors to acquire additional MSR assets in 2023, he added. <\/p>\n Smith stressed that IMBs account for the vast majority of all MSR sales, and the numbers show their role as buyers in the market is diminishing, though they remain active sellers.<\/p>\n \u201cWe see the market opportunities as pretty compelling and are raising money into that opportunity,\u201d Smith said. \u201cIndependent mortgage companies on a net basis bought $1.6 trillion in MSRs in 2021, and in 2022 they bought net $440 million [based on UPB].\u201d<\/p>\n Most of the IMBs that we’ve spoken to I don’t believe fully appreciate the potential implications of the impact of MSR pricing as it may relate to their own margins.<\/p>\n Brett Ludden, Managing Director at Sterling Point Advisors<\/cite><\/p><\/blockquote>\n<\/figure>\n In addition, Smith stressed that, \u201cWells Fargo<\/a><\/strong>\u00a0announced it intends to downsize [its mortgage footprint], and that\u2019s likely going to create even more [MSR] supply.\u201d\u00a0<\/p>\n \u201cSo, that creates a gap,\u201d he said, \u201cwhere there\u2019s more MSR being offered than it appears there\u2019s investment capital to match up against it.\u201d<\/p>\n Smith said he doesn\u2019t \u201cenvision a price crash\u201d in the MSR market this year, adding that overall prices are still relatively stable \u2014 although well off the high points reached this past summer. He does believe, however, that a supply-demand imbalance exists in the market now, which \u201cmeans that investors are going to be able to be very selective about what they buy, and they can buy a lot.\u201d<\/p>\n A good market for investors, the buyers, however, usually means sellers, like IMBs, particularly smaller IMBS, are likely to suffer some margin compression as MSR prices moderate. If these IMBs retain servicing, the values of their MSR portfolios will decline in that environment as well, according to Brett Ludden, managing director and co-lead of the financial services team at Virginia-based mergers and acquisitions advisory firm Sterling Point Advisors<\/a><\/strong>. If they sell loans without retaining servicing, the value of the loans sold to aggregators also will decline if MSR values decline.<\/p>\n \u201cMost of the IMBs that we’ve spoken to I don’t believe fully appreciate the potential implications of the impact of MSR pricing as it may relate to their own margins,\u201d Ludden said. \u201cIf [MSR] prices keep dropping, at some point, there are a number of [mortgage] aggregators who probably have pretty high pricing on their MSR portfolios [currently] that allows them to offer very competitive pricing in the industry. <\/p>\n \u201cAnd the smaller companies [IMBs] sell to those aggregators, so as MSR prices start to come down, that’s going to put pressure on the margins of smaller originators.\u201d<\/p>\n Smith said the top 15 or so IMBs \u2014 the public companies or those large enough to finance MSR purchases \u2014 already get independent reviews of their MSR portfolios and should not be impacted greatly by the new FHFA requirements. However, Jeff Juliane, also managing director and co-lead of the financial services team Sterling Point Advisors, added that moderating MSR prices are likely to lead many smaller IMBs to a \u201ccome to Jesus moment.\u201d <\/p>\n More than 80% of the top 1,000 IMBs nationwide \u2014 the bulk of the nonbank market \u2014 are expected to record $1 billion or less in mortgage production over the 12-month period through June 2023, according to a forecast prepared by Sterling Point Advisors. <\/p>\n Only 10% of IMBs are expected to exceed $2 billion in originations over the period \u2014 which includes leading loan-aggregators like Pennymac<\/strong>, NewRez<\/strong> and AmeriHome Mortgage<\/strong>, among others.<\/p>\n \u201cAt some point in time, some of those very aggressive aggregators [in terms of MSR pricing] are going to have to come down on the MSR multiples [values] \u2026 which is going to create additional margin compression for the [smaller] IMBs that are selling loans to them,\u201d Juliane said.<\/p>\n Ludden stressed that a dip in MSR pricing can impact any lender with an MSR portfolio, \u201cdepending on where they’re pricing their MSRs.\u201d <\/p>\n \u201cWhat we know is that there are a handful of large aggregators where there’s likely some pricing challenges to come,\u201d he added. \u201cBut then there’s a second group, which is all of the lenders that rely on these large aggregators for pricing, and while they don’t do any servicing-retained business, they are still at risk if [MSR] pricing starts to deteriorate.\u201d<\/p>\n Luddon said he believes FHFA\u2019s recent advisory bulletin focused on the valuation of MSRs wasn\u2019t issued at this time \u201crandomly.\u201d<\/p>\n \u201cIt came out right before yearend 2022 financials have to be shared with the GSEs [the government-sponsored enterprises Fannie Mae and Freddie Mac],\u201d he said.<\/p>\n As previously reported by HousingWire, Ludden projects<\/a> that up to 30%<\/a> of the 1,000 largest IMBs will disappear by the end of 2023 via sales, mergers, shutdowns or failures.<\/p>\n [Some lenders] are burning cash, and I can see why they keep selling MSRs because they have to. They have to raise cash because you can only burn cash for so long.<\/p>\n Keith Lind, CEO of Acra Lending<\/cite><\/p><\/blockquote>\n<\/figure>\n Keith Lind, CEO of California-based non-QM lender Acra Lending<\/strong>, the mortgage origination arm of Citadel Servicing Corp<\/strong>.<\/a>, said he wouldn\u2019t \u201cbe surprised if the number [of IMB mergers or exits in 2023] is even higher\u201d than 30%. He added that it was a smart move for FHFA to require lenders holding MSRs to get third-party valuations.<\/p>\n \u201cWhat you have to understand is when you go through a volatile year like 2022 [with rates jumping 3 percentage points in a matter of months], there are likely [lenders] miss-marking their MSRs to make themselves look profitable,\u201d Lind said. \u201cI’m sure, unfortunately, that is going to happen.<\/p>\n \u201cI think having a third-party evaluation is a good thing. It’s just as more transparency in the market.\u201d<\/p>\n Acra only sells its non-QM loans servicing-retained and recently, according to Lind, \u201ccrossed the $5 billion mark on our [MSR] servicing book [of nonconforming\/nonagency loans].\u201d That servicing-portfolio figure has not been released previously to the media, he said.<\/p>\n \u201cAs a private company, we get outside valuations [of our MSR portfolio] because of our board and just for full transparency,\u201d he said. <\/p>\n \u201cIt\u2019s hard for these little guys to stay in business,\u201d Lind added, referring to the current dour mortgage market for originators. \u201cThe free money [from the refinancing boom] is gone, right?<\/p>\n \u201c[Some lenders] are burning cash, and I can see why they keep selling MSRs because they have to. They have to raise cash because you can only burn cash for so long.\u201d<\/p>\n Unfortunately, Lind added, the bid-ask spread for MSR transactions right now \u201cis probably pretty wide.\u201d<\/p>\n \u201cIf you’re a forced seller, you’re probably not going to love the price that you’re getting on your MSR,\u201d he said. \u201cBut if you’re not a forced seller, it’s a great carry-trade<\/a> [a financed asset purchase].”<\/p>\n Azad Rafat, senior director of MSR services at San Diego-based Mortgage Capital Trading<\/strong>, said the average yield on an MSR servicing book is in the range of 10% to 11%.<\/p>\n There are big originators and other investors in the market now with plenty of cash on hand and, Lind added, \u201cThey are going to buy more MSRs because they want to steal market share.\u201d<\/p>\n \u201cI think they’re going to take that opportunity,\u201d Lind said. \u201cYou can get financing to buy MSRs, so if you’re buying a billion dollars in market value, you’re not laying out a billion in cash. You can get 70% to 80% financing for those MSR [bulk purchases].\u201d<\/p>\n Smith of Rice Park Capital stressed that he believes the market can absorb the additional supply it is seeing now without a risk of \u201csubstantial declines\u201d in pricing.<\/p>\n \u201cBut I do think that there is a gap [with supply exceeding demand],\u201d he added. \u201cI think the selling will be orderly, but there is a gap.<\/p>\n \u201cThat\u2019s why people like us [Rice Park Capital], and others like us, are lining up additional capital, so that we can be a good partner to those who need to sell and provide them with the liquidity that they need, and then at the same time provide our investors with a return that we think is pretty attractive.\u201d <\/p>\nMSR prices and the come to Jesus moment<\/h2>\n
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The window to burn cash is closing<\/h2>\n
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