Two advisory and brokerage firms active in the mortgage servicing rights (MSR) market recently unveiled three new mortgage servicing offerings for agency loan portfolios valued in total at $4 billion.
The new offerings are a sign that MSR trading continues to be healthy, although sources close to market indicate that the dynamics fueling MSR sales have changed since the start of the year — with prices for MSR packages now plateauing.
Denver-based Incenter Mortgage Advisors is currently in the market with a bulk servicing offering for a Ginnie Mae loan pool composed of 7,339 mortgages valued at $1.45 billion, with bids due August 16. The weighted average interest rate for the loan pool, which is dominated in terms of volume by mortgages originated in Texas, California and Louisiana, is 4.046%, with the servicing fee set at 0.3656%.
Incenter also is brokering a Fannie Mae and Freddie Mae bulk servicing offering involving a loan pool also valued at $1.45 billion, with bids due August 10. The package involves a total of 6,024 loans — with California, Texas and Florida originations leading all states by volume. The weighted average interest rate for mortgages in the loan pool is 3.126% — with a 0.2512% servicing fee. Information about the seller was not disclosed.
In addition, Alexandria, Virginia-based Prestwick Mortgage Group, along with its strategic partner, San Diego-based Mortgage Capital Trading (MCT), released bid documents for a bulk servicing offering involving a Fannie Mae and Freddie Mac loan pool valued at $1.1 billion, with bids due August 17. The 5,590 mortgages in the loan pool to be serviced have a weighted average interest rate of 3.371%, with a 0.25% servicing fee. The top three states by volume for originations in the package are Florida, Georgia and North Carolina, according to the bid documents, which describe the seller as an “independent mortgage banker.”
Last month, Incenter and Prestwick also unveiled four other mortgage-servicing rights (MSR) offerings for agency loan portfolios that combined are valued at some $3.7 billion — with bids for the offerings due in late July. Prestwick, along with its strategic partner, MCT, released bid documents for two separate MSR offerings involving agency loan portfolios valued at $1.85 billion in total. Incenter earlier in July also came out with two large MSR offerings, which are tied to agency loan packages worth $1.84 billion.
MSRs gain value as interest rates rise, in part because upward-bound rates cause mortgage refinancing to slow. That reduces mortgage-prepayment speeds — increasing the effective long-term yield of the servicing rights tied to those loans.
Tom Piercy is managing director of Incenter Mortgage Advisors, which over the past 28 years or so has managed more than $1.5 trillion in MSR sales and purchases based on the value of the loan-servicing portfolios involved, according to Kroll Bond Rating Agency. Piercy said the volume of MSRs available for sale has been at historic levels over the first half the year and continues to be strong.
However, he added, since “mid-May we have started to see the market pull back a bit [on pricing for deals] due to volume” and because rising rates have driven prepayment speeds for mortgages down to a rock-bottom level. Declining prepayment speeds help to boost MSR values and hence prices, but once prepayment speeds bottom-out, that pricing accelerant also dissipates.
“We pushed lifetime CPR [conditional prepayment rate] down to the lowest that it could be,” Piercy said “The minimum lifetime prepayment rate should be 6% to 8% CPR, just because of death, divorce and relocation.
“So, when you hit that floor, which is where we are, there’s no way you can really go [down further].”
Still, other factors continue to keep the MSR market active and attractive for sellers and buyers, Piercy explained. Chief among them is the continuing uncertainty in the market over the course of inflation and interest rates as well as the steep drop-off in mortgage originations, particularly refinancing, due to the dramatic uptick in rates compared with 2021.
These market challenges create potential or actual liquidity challenges for some lenders and selling MSRs can help to create additional liquidity.
Those market realities, coupled with slipping but still-strong MSR pricing, have helped to keep deal volume healthy, Piercy explained. In fact, in 2022 through the end of July, Incenter Mortgage Advisors had traded a total of $180 billion in MSRs — based on the value of the loan portfolios involved.
“The volume isn’t slowing down, Piercy added. “There’s a lot of deals that are going up that even the advisors aren’t seeing, and if we’re not seeing it, you’re probably not seeing it.
“So, there’s a lot of those discussions taking place. And we still see a steady flow of transactions.”
Piercy said many lenders and other entities holding MSRs were selling in the first half of the year to take advantage of the historic run-up in MSR values, which continued to skyrocket as rates ramped up. MSR valuations have recently begun to slide back slightly, however, as high deal volume persists even as prepayment speeds have hit a floor — which means “buyers can become more selective,” Piercy explained.
Those dynamics are being driven, in large measure, by conservative balance-sheet management in the face of uncertain times in the housing industry.
“Now, they [holders of MSRs, such as nonbanks] are being cautious and wanting to store cash and convert to cash,” Piercy said. “Now, while there still is an active [MSR] market and a liquid market, it’s not a bad strategy.
“[If I’m a seller] I’m not getting a 5X or a 5.25X [multiple], but I’m able to get 4.8- to 4.9-type multiples. You know, pigs get fat and hogs get slaughtered, right? (The price paid for loan-portfolio servicing rights is expressed as a multiple of the net servicing fee.)
“In other words, if you want to sell, or you need to sell, you sell at the market [and don’t act like a ‘hog’ waiting for a better return],” Piercy added, “particularly in these times, with forecasts where they are for originations and what mortgage companies are facing.”
In the current market, Piercy explained, lenders and other holders of MSRs] are still “able to sell this asset, create a slight gain or breakeven, but convert to cash while they can.”
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