The mortgage-servicing rights (MSR) market went on a tear at the start of 2022, and that hot streak has continued into the second quarter as interest rates on 30-year fixed mortgages continue to rise — now up 2 percentage points since the start of the year and still seemingly upward bound.
As rates rise, MSR prepayment speeds drop — a byproduct of diminished refinancing activity. That, in turn, amplifies the value of MSRs because they pay out over a longer period. Those dynamics sparked some major MSR bulk offerings over the first quarter, as HousingWire reported previously.
“If rates rise and refinances slow down [as they have], the cash flow stream on MSRs goes longer,” explained John Toohig, managing director of whole loan trading at Raymond James in Memphis. “If that cash flow stream goes longer, it’s worth more, so slower CPR [prepayment] speeds mean a higher MSR value.
“So yeah,” Toohig added, “I’m not surprised to see that sellers right now are trying to lay off MSR because it’s the highest value we’ve seen in years because of slower prepayment speeds.”
So far through May 10, the robust MSR deal activity that marked the initial quarter of 2022 has carried forward now midway through the second quarter.
Since April 1, Denver-based Incenter Mortgage Advisors has unveiled seven bulk MSR offerings involving Fannie Mae, Freddie Mac and/or Ginnie Mae servicing rights. The value of the loan portfolios tied to those servicing rights — which are being auctioned off in either April or May — ranges from $1.96 billion to an eye-popping $12.94 billion across the seven deals — with the overall value of the MSR offerings totaling $35.3 billion.
The MSR package sizes reflect the value of the underlying book of mortgages being serviced, not the actual sales price.
“Q1 2022 saw a fairly steep curve in the increase of MSR values from start to finish, as reflected in every public company [mortgage lender] reporting improved MSR values to offset lower net income from originations,” said Tom Piercy, managing director of Incenter. “As we are about to enter the mid-point of the Q2 2022 secondary MSR market, interest rates continue to significantly reduce prepayment exposure, which supports strong MSR values.”
The Prestwick Mortgage Group, an Alexandria, Virginia-based MSR advisory and brokerage firm, is also in the thick of the MSR action. The firm brought to market at least three offerings with bid due dates in April — a $1.6 billion Fannie and Ginnie Mae offering; a $520 million Fannie offering; and a $1.8 billion Fannie and Freddie package, which is being offered in conjunction with San Diego-based advisory firm Mortgage Capital Trading (MCT), offering circulars show.
More recently, also in conjunction with MCT, Prestwick unveiled a “Texas/Southeast” offering of Fannie Mae MSRs valued at $1 billion, with bids due May 5.
“As a result of a combination of declining origination volume and margin pressure [rising rates], we anticipate that many MSR asset holders will take advantage of these favorable conditions in the near term,” Bill Shirreffs, head of MSR Services at MCT, said in a statement reflecting on MSR performance in the first quarter of the year. “Overall, the bulk MSR market should be incredibly robust throughout 2022.”
Another major advisory firm in the MSR space, New York-based Mortgage Industry Advisory Corp. (MIAC), has also been on a roll this year, including in the second quarter of 2022. MIAC so far in the current quarter has unveiled five MSR offerings featuring Fannie Mae, Freddie Mac and/or Ginnie Mae servicing rights with bid due dates in April or early May. The MSRs being auctioned in those bulk deals are tied to loan portfolios with a total value of $12.8 billion — ranging in value per bulk offering from $1.83 billion to $4 billion.
“Political tension, the Russia and Ukraine conflict, inflation, I can go on and on, so it’s nearly impossible to precisely predict where rates will end 2022,” Michael Carnes, managing director of the MSR valuation group for MIAC, said in an interview conducted late in the first quarter of the year. “… [Still,] you’re looking at multiple Fed rate hikes this year, and the general market consensus is that rates will continue to go higher.
“I don’t foresee there being any major disruptions in the supply chain or the buy side with respect to MSRs,” Carnes continued, “largely because the demand for … MSRs is still very high. There has been a large amount [volume] of deals come to market, so it’s shaping up to be a record year for MSR bulk transactions and at prices that are very competitive.”
A recently released report by New York-based mortgage-data analytics firm Recursion shows that year to date through the first week of May some $396.3 billion in agency MSRs were transferred between institutions, with nonbanks being both the leading purchasers and sellers.
Banks acquired about $88.1 billion in agency MSRs sold by nonbanks ($72.3 billion) and other banks ($15.8 billion). Nonbanks acquired $308.2 billion in agency MSRs over the period sold by other nonbanks ($297.3 billion) and banks ($10.9 billion).
The Recursion servicing-rights data reflect the agency-recorded transfer period and balance, not necessarily publicly announced sales volumes and dates.
The top MSR buyers over the period, according to Recursion’s data, were J.P. Morgan Chase, $52.8 billion; Mr. Cooper, $51.7 billion; Freedom Mortgage, $48.7 billion; Lakeview Loan Servicing, $40.9 billion; and Carrington Mortgage Services, $39.6 billion.
The leading sellers to the top 10 servicers over the first four months of 2022 included United Wholesale Mortgage (UWM), with a total of $69.3 billion in MSRs sold, including $25.9. billion transferred to J.P. Morgan, $14.6 billion to Carrington and $28.8 to Matrix Financial Services Corp.; and Homepoint, a total of $45.2 billion in MSRs transferred to Freedom — which itself sold $22.3 billion in MSRs to three other lenders (Mr. Cooper, Lakeview and Rocket Mortgage) and also was the leading MSR purchaser in 2021 at $143.4 billion in MSRs acquired.
Others in the mix in selling to the leading servicers this year through April include Rocket, a total of $48.5 billion in MSRs sold to Lakeview ($25 billion), Onslow Bay Financial ($18.6 billion) and Carrington ($4.9 billion). Rocket also acquired $15.5 billion in MSRs from two other nonbank lenders during the period. And finally, loanDepot, sold $20.5 billion in MSRs to Mr. Cooper, and Guaranteed Rate transferred $13.8. billion to J.P. Morgan.
“Many small to mid-size originators who have not sold in this MSR bull market have now begun to offer all or most of their MSR assets as a result of [the] flattening of the price curve, to capitalize on current market conditions,” Piercy said. “The result is a recent surge in offerings to the market with demand keeping up due to new buyers entering the space.
“However, certain buyers who have been quite active are either much more selective in what they will bid or have pulled back entirely as they digest what they’ve acquired in the early months of 2022,” Piercy added in a note of caution about the future. “We forecast a steady flow of bulk MSRs to be offered through the end of the [second] quarter [but] must wait to see what pricing will do as the Fed continues to fight inflation through their rate increases and volume continues to stay at current or even lower volumes in Q3.”
