Steadfast Capital looks to MSRs, sees diamonds in the rough
Mortgage servicing rights remain an attractive acquisition target, especially when factoring in how much stake big players such as Ocwen and Nationstar are willing to take in MSR acquisitions.
But for other firms that want ‘in on’ the mortgage servicing rights buying spree, financing is usually needed.
This is where Sugarland, Texas-based Steadfast Capital steps in.
No stranger to mortgage servicing, the investment advisory firm and capital manager not only provides detailed MSR valuations, it’s now raising financing to help companies invest in mortgage servicing rights.
The firm is a bridge, if you will, helping smaller, but solid institutions benefit from a potential boon in MSR deals.
The boutique investment company not long ago began making it public that it wanted to help provide capital solutions to independent mortgage bankers who wish to add servicing portfolios to their lines of business. Steadfast hopes to provide these companies with the capital they need to make this a reality.
"In terms of unpaid principal balance, there are mortgage bankers that have retained a lot of servicing over the past 2 years – many have retained over $1 billion," said David Fleig, Steadfast Capital president and CEO.
Yet, the servicing space has shifted, prompting mass sales of MSRs since the financial crisis, a trend that may continue especially when considering today’s hyper-vigilant regulatory environment and the coming shift in how MSRs are defined when calculating a firm’s Tier-1 capital ratio under the new Basel rules.
For starters, under the proposals, the value of mortgage servicing rights can only be used to account for up to 10% of common equity when determining a bank's Tier 1 capital requirements.
When it comes to the MSRs being created today, Fleig sees quality sitting in the market.
"Smart mortgage bankers are quietly accumulating big servicing portfolios, the underlying loans are extremely high quality, the documentation is good. This is agency servicing – for Fannie, Freddie or Ginnie," he said.
When looking at rates, they’ve been rising the past six weeks, Fleig points out. "If you own servicing when rates go up, you benefit because the prepayment speeds fall, increasing valuations."
As for what mortgage firms Steadfast will venture down this road with by providing capital for MSR deals, the firm remains selective.
"If a mortgage company wants to hire us to raise capital, we are going to be very selective of who we do business with. They need to take the regulatory environment very seriously," he explained.
Steadfast hopes its capital bridge leads to more MSR bulk acquisitions.
"Right now there are not enough bulk deals – other than really large deals," Fleig told HousingWire. "A lot of that is the result of the financial crisis and Basel III, and some of the big aggregators just want to reduce their exposure to the MSR asset. However, we expect this to change, as mortgage bankers that have accumulated MSR in recent years seek liquidity, and signs of that are already showing up in the market."
But for those who want to play, there is demand out there for the kind of equity or debt financing that would enable the companies to move forward with MSR accumulation or bulk transactions.
In fact, the appetite is so strong for MSRs that Fleig and Steadfast Capital are willing to bank on it by providing the capital for the right companies.