Chicago-based Rate has recently changed its servicing strategy, retaining mortgage servicing rights (MSRs) instead of selling.
“We’ve been retaining all of our MSRs for the last 12 months, so we’re over $50 billion in MSR retention,” CEO Victor Ciardelli said in an exclusive interview with HousingWire. “We really believe in retaining the MSRs, staying close to the customer.”
Rate’s approach reflects a broader trend of mortgage lenders holding onto their portfolios or seeking to add MSRs as a way to recapture borrowers when rates eventually fall.
John Sullivan, managing director of MSR advisory services at Milliman, has seen that shift firsthand. Speaking during IMN’s Mortgage Servicing Rights Conference in New York on Monday, he said he’s having more conversations with clients about retaining their portfolios “unless liquidity is an issue,” and about monetizing them if they are not hedging.
Higher demand for MSRs is not limited to independent mortgage banks (IMBs). Depository institutions are also showing more interest, executives told HousingWire during the conference.
“Banks historically are not great at recapture, but we think that given some changes on the Basel capital front, we’re going to see more bank participation in this space on a go-forward basis, and I think banks will think about just customer acquisition in general, cross-selling in general,” said Larry Goldstone, president of capital markets and lending at BSI Financial Services.
Strategic investors are also willing to grow their portfolios. Rob Williams, co-founder and CEO at Grander Investment Management, a specialized asset manager focused on MSRs, said he’s tactical but sees MSRs as a “spectacular asset” that can reach double-digit returns.
“I can probably be more patient,” he said during the conference, when comparing his approach to the other buyers. “I can be more tactical.”
The buyer base views MSRs through different lenses.
Rich McRedmond, managing director at CrossCountry Mortgage, said that while banks see MSRs as part of their consumer banking strategy, real estate investment trusts (REITs) see them as a pure investment. And mortgage companies see them as a borrower recapture tool “from when they get the mortgage to when they get the next mortgage.”
Multiples and yields
Conventional, pristine MSRs are seeing 7x multiples amid high demand, a level not reached in more than two decades.
“We’ve seen some pretty extraordinary multiples of late,” Goldstone said. “This is usually an inexpensive asset, and therefore an asset that people want to be able to own. I think you could hedge MSR pretty effectively and still get low-double digits, high-single digit returns up until about the last year. That’s pretty attractive for an asset that really doesn’t have a whole lot of credit risk associated with it.”
Simon Aldrich, senior executive vice president at Freedom Mortgage, believes that at this point, “it’s very difficult to be in this market if you don’t have recapture.”
“In our model, we don’t hedge, so I’m not worried about rates going up or rates going down. Rates go up, I get the pickup at slower speeds. Rates go down, our call center kicks into gear.”
Bayview Asset Management, which acquires MSRs from the bulk and flow markets and uses five different subservicers, has also built out a full recapture strategy, including through its acquisition of Guild Mortgage. Managing director Michael Lau said Bayview has partnered with investors, including sovereign wealth funds and pension funds, that have long-duration strategies.
“MSRs are great because they’re not correlated to the equity or the bond market, and gives them something alternative that also, because we hedge out all the interest rate risk for them, delivers a very consistent return on their money, net of our fees,” Lau said.
Opportunistic sales
Some companies have taken advantage of current pricing to sell MSRs for different reasons, including to pay back debt or raise funds.
In the third quarter, Rocket Companies sold $23 billion of unpaid principal balance (UPB) for $379 million in cash proceeds, retaining the subservicing and recapture services on nearly 70% of the MSRs sold. Analysts told HousingWire the company usually sells production in the wholesale channel due to lower recapture possibility.
Pennymac Financial Services entered into an agreement to sell $29 billion in UPB of low-coupon conventional MSRs, with $490 million of proceeds expected to pay down debt. The transaction is expected to close in the fourth quarter.
Meanwhile United Wholesale Mortgage (UWM) sold about $60 billion — at a roughly 6x multiple — to JPMorgan Chase, sources told HousingWire. The companies declined to comment. This is part of a plan to bring up to $80 billion of MSRs to market in the fourth quarter, with the expectation of being paid more than $1.8 billion in an attempt to reduce leverage.
Newrez President Baron Silverstein said his company is taking a disciplined approach. Across the Newrez portfolio, 60% of loans were originated before or during the COVID-19 pandemic.
“In today’s market, given where we are from a rate perspective, there’s pressure in a competitive environment where MSRs get created — where that gain on sale is from an all-in gain-on-sale perspective on loans that we originate or buy. And when we think about that, we get very selective and stay very disciplined about how we put that capital to work,” Silverstein said.
“When you think about hedging in a market like this, that also requires a lot of capital, and it’s very challenging in these markets today, regardless of the interest rate environment. This has been the case for the last year to year and a half.”
What’s next?
Looking ahead, servicing executives believe that multiples can stay higher as elevated mortgage rates reduce prepayment risks, which supports MSR cash flows. Some of them said multiples could move lower if there’s a liquidity issue due to large bulk sales hitting the market.
Regulation could also play a role. “If Basel III goes through and the banks decide to get back into the space, I think the high-six multiples could be relatively inexpensive,” Goldstone said. “You could see multiples in the 7x-8x category.”
