Photo: Derek Jensen (housing archive, 2005)
Mortgage lenders and investment funds are competing for the right to service home loans, pushing pricing for some of the strongest portfolios toward levels industry executives say have not been seen in more than two decades.
High-quality conventional mortgage servicing rights, known as MSRs, are trading near 7 times in the market’s pricing shorthand, according to executives quoted in a November 3 HousingWire report. Those prices apply to a particular segment of the market, not every servicing portfolio.
The competition is producing two different responses. Some lenders are keeping servicing to maintain contact with borrowers and win their next mortgage. Others are selling portfolios while prices are strong to raise cash or reduce debt.
Keeping the customer relationship
Chicago-based Rate has retained all of its MSRs over the past 12 months, CEO Victor Ciardelli told HousingWire. He put that retention at more than $50 billion and said staying close to the customer is central to the strategy.
At the Mortgage Servicing Rights Conference in New York on Monday, Milliman’s John Sullivan said more clients are discussing holding their portfolios unless they need liquidity. The attraction is borrower recapture: when a homeowner wants another loan, the company already servicing that mortgage has an existing relationship to build on.
Different buyers approach that relationship differently. Banks may see servicing as a way to acquire customers and sell other financial products. Mortgage companies emphasize winning repeat mortgage business, while real estate investment trusts may focus on the investment return, executives told HousingWire.
Freedom Mortgage executive Simon Aldrich said a recapture operation is increasingly important at current prices. In his company’s model, slower repayments can help when rates rise, while its call center seeks new business when rates fall. That is one company’s strategy, not a guarantee that servicing values are insulated from changes in rates.
Strong prices also encourage sales
The same demand that makes servicing attractive to retain gives sellers an opportunity to turn portfolios into cash.
Rocket Companies sold servicing rights tied to $23 billion in unpaid loan principal during the third quarter for $379 million in proceeds, HousingWire reported. It retained subservicing and recapture services on nearly 70% of the rights sold.
Pennymac Financial Services agreed to sell rights associated with $29 billion in unpaid principal. Expected proceeds of $490 million would be used to pay down debt, with the transaction expected to close in the fourth quarter.
HousingWire also reported, citing sources, that United Wholesale Mortgage sold rights tied to about $60 billion in unpaid principal to JPMorgan Chase at roughly a 6-times multiple. Both companies declined to comment to the publication. The report described that sale as part of UWM’s plan to bring up to $80 billion of MSRs to market in the fourth quarter to reduce leverage.
The unpaid principal figures describe the balances of the underlying mortgages. They are not the cash prices paid for the servicing rights.
Returns depend on price and strategy
Investor interest does not remove the need for discipline. Newrez President Baron Silverstein told HousingWire that competition and the capital needed for hedging make it important to be selective about new investments.
Executives at the conference said elevated mortgage rates can support servicing cash flows by reducing early repayments. But large portfolios offered for sale could pressure pricing if buyers’ available cash does not keep pace.
BSI Financial Services executive Larry Goldstone said greater bank participation could support still higher multiples if changes to bank capital rules encourage banks back into the market. That is a conditional outlook, not an adopted rule or an assured price increase.
For lenders, the choice is therefore more than whether today’s bid looks attractive. It also depends on their need for cash, the cost of managing the portfolio and their ability to turn an existing servicing relationship into future mortgage business.
The archive photograph shows housing near Union, Kentucky, in June 2005. It does not identify loans in any portfolio discussed here. Photo by Derek Jensen (Tysto), public domain, cropped.
JBizNews Desk | New York
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