Rising interest rates trigger an exuberant MSR market 

Mortgage servicing rights are now in high demand and sales are heating up

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Incenter Mortgage Advisors was flooded with a surge of mortgage-servicing rights business in January — with bulk MSR sales approaching in one month what the firm normally tallies in an entire year.

Denver-based Incenter’s managing director, Tom Piercy, said he expects the rising tide of business to continue for the foreseeable future, so long as the housing market is swept up in a rising-rate environment — prompting holders of MSRs to sell the assets. MSRs gain value as interest rates rise, in part because upward-bound rates cause mortgage refinancing to ebb, which slows prepayment speeds on mortgages — increasing the effective long-term yield of the servicing rights tied to those loans.

Incenter completed a dozen bulk sales transactions in January involving MSRs for agency-backed loan pools that together had a total unpaid principal balance of $113.2 billion 

“On average, historically, we’d be selling $100 billion to $125 billion [in MSRs] annually,” Piercy said. “And now we just did over $110 billion for the month of January.”

Piercy explained that companies, primarily bank and nonbank mortgage originators, have been “stockpiling” MSR assets over the past two years, holding them on their balance sheets and waiting for the right moment to sell them. That “trigger” moment finally arrived in January, he added.

“The big trigger was we had a half-point increase in the 30-year par rate [for a mortgage] in January,” he said in a recent interview. “The generally accepted benchmark par rate in the marketplace was hovering around 3 1/8 [3.125%] at the beginning of the month, and that rose to 3 5/8 [3.625%].”

San Diego-based Mortgage Capital Trading (MCT) described market conditions as being “ripe for MSR bulks sales” in an analysis posted on its website in late October of last year.  At that time, with mortgage interest rates still hovering around 3% or less, the uptick in MSR transactions was likely being driven by lenders’ year-end balance sheet adjustments and concerns over a potential capital-gains and other corporate tax increases coming out of Washington as opposed to rising interest rates, according to Piercy.

“The economy continues to heal from the pandemic and MSR pricing has seen improvement as a result,” MCT’s analysis stated. “Many servicers are still sitting on large portfolios as a result of MSR multiples/prices going to zero in early 2020, and the market is [now] becoming ripe for MSR bulk sales and there is ample capital/liquidity from buyers ready to purchase.”

Piercy said many servicers had been holding onto the lion’s share of their MSR assets since the pandemic-induced liquidity crisis hit the market in March and April of 2020. 

“Ultimately the market came back pretty quickly, by the end of Q2 [2020] really, but everybody felt the servicing was worth much more than what was being paid in the market at the time,” he explained. Consequently, Piercy said, many of the servicers chose to retain and stockpile MSRs, “with the anticipation that ultimately rates were going to rise.”

“They were willing to manage that [MSR] risk on their balance sheets because rates were historically low,” Piercy added. “So, you had two massive mortgage origination years [2020 and 2021], and you had your top mortgage originators retaining servicing, and so this asset just expanded.”

Now, with the Federal Reserve recently signaling clearly that it is taking a “hawkish position” on rates, and a rate-hike expected in March, the stage is set for a massive sell-off of MSR assets.

“Without question, with the Fed and everything it has stated and the expectation of rates rising, [MSR] buyers are much more confident with what they perceive as the [mortgage] prepayment performance going forward,” Piercy said. “And they are implementing that into their institutional valuation of the MSR assets. And so, we immediately started seeing a steepness in the pricing curves for MSRs in January, and week over week it has increased.”

As a result of the hot market for MSR sales, Incenter notched a dozen bulk MSR sales in January involving agency-backed loan pools ranging in size from $851.5 million to $23.7 billion. In fact, five of the deals involved MSRs pegged to loan pools that exceeded $10 billion in unpaid principal balance. In addition, Piercy said Incenter is already preparing bids on two new deals expected to hit the market in early February “worth about $25 billion combined.”

A look at the pricing data supplied to HousingWire by Incenter tells the story of why the MSR market is so exuberant right now. The net servicing fee — which is the MSR income stream — across the dozen MSR sales transactions brokered by Incenter last month ranged from 25 basis points to 39 basis points — with a basis point representing a fraction of 1 percent. 

The price paid for the servicing rights on the agency loan portfolios — composed of Freddie MacFannie Mae and/or Ginnie Mae loans — is expressed as a multiple of the net servicing fee, and it continued to increase steadily over the month of January. Across the 12 deals handled by Incenter, the multiple paid by the MSR buyers ranged from a low of 3 to a high of 5.02. 

In fact, the largest MSR deal of the month for Incenter, involving a loan portfolio valued at $23.7 billion, commanded a price multiple of 5 — or a sales price of 125 basis points (which equates to 1.25% of the total $23.7 billion value of the loan portfolio).

MSR buyers include banks, nonbanks, real estate investment trust as well as private equity firms, according to Piercy and public records. Piercy added that private equity firms have been particularly active in the MSR market recently.

“The influence of private-equity in the space [is through] either an MSR direct investor who has their agency approvals [and] are in partnership with a servicer, or they have an equity stake in an originator,” he said. “They’ve been in this space since after the financial crisis [more than a decade ago] but their numbers have expanded.”

One of the leading purchasers of agency MSRs in 2021, according to mortgage-data analytics firm Recursion, was PHH Mortgage Corp., which is a subsidiary of Ocwen Financial Corp. PHH Mortgage ranked second among the leading purchasers of agency MSRs in 2021, with nearly $68 billion in servicing rights acquired, Recursion’s data shows. 

In May of last year, Ocwen announced it had finalized an MSR joint venture with private equity firm Oaktree Capital Management.

“Ocwen and Oaktree will invest up to $250 million of equity capital … to acquire Fannie Mae and Freddie Mac mortgage servicing rights (“MSRs”),” states the press release announcing the joint venture.. “… PHH Mortgage Corporation (“PHH”), a wholly-owned subsidiary of Ocwen, will be the sole provider of subservicing, portfolio recapture services and certain other administrative services.”

Another private-equity player in the MSR space is St. Petersburg, Florida-based Marlin Mortgage Capital, which has raised some $600 million for MSR purchases, according to industry publication Inside Mortgage Finance.

“We’ve had new groups come in that have acquired MSR platforms,” Piercy said. “We call them shells, where they are able to gain access to having Fannie and Freddie [agency] MSRs, and Marlin Mortgage is one of those.”

Marlin’s website states that it was created to act as a platform for “buying and selling residential mortgage servicing rights.”

“Marlin will enter into various subservicing agreements with best-in-class bank and nonbank operators,” the company’s website states. “… Marlin [also] has initiated the process of securing certain federal and national servicing licensing approvals necessary to own MSR assets.”

Another private equity player in the MSR space is Minneapolis-based Rice Park Capital. It announced in January of this year that it “had closed on a $300 million capital commitment from M&G Investments for its inaugural mortgage servicing rights (MSR) fund.”

“The initial $300 million of equity gives us the capacity to purchase approximately $70 billion of MSRs,” said Nick Smith, Rice Park founder and CEO, in announcing the deal. “As a result of our management team’s industry relationships, we’ve already begun cultivating MSR investment opportunities within our network of origination and sub-servicing partners.”

Yet another private equity player looking to capitalize in the MSR market is Austin, Texas-based Prophet Capital Asset Management, which purchases MSRs “in tandem with our premier mortgage-servicing partners,” the company’s website states.

Prophet in mid-January of this year filed a Form D notice of exempt offering of securities with the Securities and Exchange Commission in which it reveals that more than $65 million has been raised from investors for the “Prophet MSR Opportunities limited partnership.”

“We had a pandemic during which the government had to get involved, causing rates to drop historic levels for two years,” Piercy said. “And now you’ve got natural market influences coming out of this that are generating a significant influence in the MSR space.

“We anticipate, so long as we continue to see this perception of interest rates rising — barring something happening on the other side of world that absolutely could throw interest rates into a state of flux — that you’re going to see this type of [hot] market continuing well into the second quarter.”

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