A bull year is ahead for MSR trading
The trading volume of mortgage-rights servicing (MSRs) so far this year is on pace to meet or exceed last year’s robust mark, when MSRs on some $1 trillion worth of home loans exchanged hands — then fueled by the spike in interest rates, industry players say.
As of late April 2023, mortgage interest rates, though still volatile, have been on a downward trajectory since the start of the year. That should be a drag on MSR pricing and trading, given MSR values tend to decline as interest rates drop because lower rates prompt more refinancing — lowering the long-term payout for the asset.
That trend, however, is not materializing in the market so far, according to several MSR market experts interviewed by HousingWire. The main reason for that is that the bulk of the MSRs now being traded are linked to solidly underwritten mortgages originated in 2020 and 2021, when interest rates were in the 3% range — hence they represent quality MSRs that are now at very low risk of prepayment.
“Given the volume that we’ve seen in the market so far this year, I expect another really strong year in [MSR] brokerage activity,” said Mike Carnes, managing director of the MSR valuation group at the Mortgage Industry Advisory Corp. (MIAC). “We hit nearly $1 trillion dollars last year, and I would say you could potentially have another $1 trillion year this year.”
Carnes said MIAC currently has in the pipeline MSR offerings worth a total of some $14 billion — based on the total loan balance serviced — with deals representing about $4 billion of that total slated to close this month. That figure doesn’t include a pending deal in the works that he said would “significantly move that number.”
Tom Piercy, managing director of Incenter Mortgage Advisors, said there is “a tremendous amount of capital focused on MSR assets” now, with a good mix of buyers and sellers — including banks and independent mortgage banks (IMBs) as sellers and buyers, plus there is a healthy mix of institutional players (including insurance companies, private-equity firms and real estate investment trusts, or REITs) bolstering the ranks of buyers this year.
Piercy said Incenter has some $130 billion in MSR offerings that have gone to bid so far this year or are in the pipeline, including public bulk-auction offerings and private directly negotiated deals.
“When you look at our numbers right now relative to where we were a year ago, we are certainly on track to replicate it [last year’s healthy performance], and we may even exceed it given some of the deals in the pipeline,” Piercy said. “We have been very pleased with the manner in which this market has responded since the anticipation earlier in the year of this being a buyer’s market.
“There is a tremendous amount of capital committed to this space, which is creating, I think, competitive factors that have maintained an elevated pricing market.”
Among the active buyers prepared to participate in the market, according to industry observers who spoke with HousingWire, are the following:
• Annaly Capital Management [a REIT that controls Onslow Bay Financial].
• Bayview Cos. [which controls Lakeview Loan Servicing].
• Rice Park Capital Management.
• Prophet Capital Asset Management.
• Voya Investment Management.
• Mr. Cooper (formerly Nationstar Mortgage).
• Rithm Capital (also known as NewRez);
• Two Harbors Investment Corp.
Of course, there are many other players active in the MSR market, including banks and IMBs. In fact, according to mortgage-data analytics firm Recursion, leading the charge in bulking up their all-agency MSR portfolios (involving Fannie Mae, Freddie Mac and Ginnie Mae loans) between the end of 2021 and April of this year are the following lenders:
- JP Morgan
- Lakeview Loan Servicing
- Freedom Mortgage
- Mr. Cooper
- Rithm Capital
- US Bank
The growth in the lenders’ MSR portfolios includes both servicing retained on new loan originations as well as MSR acquisitions. The lenders rank among the top 10 in terms of market share in the all-agency MSR market, according to Recursion’s data.
Lenders among that top 10 that recorded a decline in their MSR portfolios over that same period include Wells Fargo, Rocket Mortgage and United Wholesale Mortgage (UWM), according to Recursion’s data.
Nick Smith, founder and CEO of Rice Park Capital Management, said his firm is an active buyer in the MSR market this year, adding that there is a huge supply of attractive MSR assets in the pipeline that he expects will be traded over the next 12 to 18 months.
That includes, he said, some $1.5 trillion (UPB) in legacy MSRs from loans made in 2020 and 2021 primarily by IMBs. Some active bank sellers are in the market as well — such as Wells Fargo, which announced recently that it had finalized a deal to sell some $50 billion in MSRs.
“So, you’ve got a $1.5 trillion [in legacy MSRs expected to trade] which is like the rat going through the snake, plus you’ve got the new production volume [at current market rates] that’s going to trade, let’s call that $1 trillion to $1.25 trillion,” Smith said. “… It’s a really low-risk, high-quality asset that I would say, for investors, is sort of a dream asset to buy.”
Not everyone is bullish on the MSR market, however. Ben Hunsaker, a portfolio manager at Beach Point Capital Management, an alternative-credit investment firm, said MSR prices are too high now “relative to other asset classes.”
“Prepayments [via refinancing] can get a lot faster,” he said. “They can’t get a lot slower.
“Expenses [due to rates and inflation] can get a lot higher, and so it feels like MSRs are priced pretty tightly in the grand scheme of investable assets in 2023.”
Azad Rafat, senior director of MSR services at Mortgage Capital Trading (MCT), said his firm, in conjunction with advisory firm Prestwick Mortgage Group, has marketed four MSR offerings so far this year valued in total, based on UPB, at $838 million. Rafat said MCT typically works with smaller MSR offerings under $1 billion.
At least another two MSR offerings to date, with a combined value of about $1.4 billion, were marketed exclusively by Prestwick, bid documents show.
“We’re seeing very much interest from private equity funds, or companies backed by private equity funds,” Rafat said. “That’s the typical players [MSR buyers] we’re seeing right now.”
Rafat added a note of caution about the future course of the MSR market, however, or at least its unknowns. The biggest of those unknowns is whether a recession is in the offing. If so, that could impact borrowers’ refinancing choices as well as the value of MSRs — assuming the downturn is severe enough to prompt an increase in loan-prepayment speeds even among legacy borrowers.
“Consumer debt has risen from $11 trillion to $12 trillion to a little over $16 trillion as of the end of 2022,” he said. “The question is how much will that [increasing debt] put pressure on them to refinance, even though it’s difficult for them to give up those 3% loans?
“Right now, the whole industry is under the assumption that those prepayment speeds are going to remain low for a long time. The question is what will happen when you have a recession [and rates likely decline further].”
Smith concedes that both current MSRs as well as the huge pool of MSRs tied to low-rate legacy loans from 2020 and 2021 will be impacted by declining interest rates. But he adds that because the legacy-loan MSRs are now so far out of the money in terms of refinancing, interest rates would have to decline drastically from where they are now to drag down MSR pricing significantly.
“If rates drop 100 basis points from here [to the low 5% range, as the Mortgage Bankers Association predicts will happen by year’s end], the legacy MSRs go down by 4% [in price] while new [prevailing-rate] origination [MSRs] go down by 25%,” he said. “It’s just a much different order of magnitude.
“So they [legacy-loan MSRs] have a big buffer, and even though rates dropping … will have a negative price impact, it’s dampened. There is much less price volatility for rate drops for those MSRs, compared with new-issue stuff.”
Carnes points out that of the estimated $10 trillion-plus in mortgage originations from 2020 and 2022 “over $8 trillion of that was originated in 2020 and 2021.”
“There’s still a significant amount of saturation of that legacy product,” he added. “Even if interest rates go down by around 150 basis points from where we are today [to around 4.5% from the low 6% range now], these Covid-era originations [some at rates below 3%] are still out of the money and not at significant risk for refinancing.
“… Right now, there’s a good number of buyers in the market, including some new buyers, and as long as the demand for MSRs remains strong, I think so too will the value of MSRs. It’s a very attractive asset, particularly the legacy MSRs.”