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Two Harbors subsidiary to buy agency MSRs from Flagstar

The great MSR sell-off continues

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Matrix Financial Services Corp., a wholly-owned subsidiary of Two Harbors Investment Corp. (TWO), inked a deal this week to buy agency mortgage servicing rights from Flagstar Bank (FBC), making it the latest firm to benefit as banks step back, selling off their MSRs.

Through this acquisition, Matrix is acquiring MSRs tied to a pool of residential mortgages with an unpaid principal balance of $40.7 billion for the purchase price of $500 million.

The pool includes Fannie Mae and Ginnie Mae loans originated after 2010. As part of the deal, the companies agreed Flagstar will act as a subservicer of the loans underlying the MSRs. This agreement will remain in effect for as long as the underlying loans remain outstanding.

"We are pleased to announce this significant acquisition of MSRs from Flagstar Bank, a top-tier national mortgage lender," said Thomas Siering, Two Harbors’ president and chief executive officer. "This purchase represents substantial ongoing progress related to our MSR investment initiative."

The deal announced is not out of the ordinary for Two Harbors or its Matrix subsidiary.

In fact, Matrix recently inked a deal with PHH Mortgage to acquire MSRs. As part of a flow-sale agreement, the Two Harbors subsidiary agreed PHH could sell Matrix MSRs on 50% or more of PHH’s newly originated home loans.

At the time, Dan Altscher, vice president and research analyst for FBR Capital Markets, admitted Matrix has been focused on buying MSRs for a while as its parent company focuses on becoming a diversified mortgage REIT that can better serve shareholders.

MSRs gained traction in the past year.

Valuation advisor MountainView Servicing Group managed several sales this year. The firm noted back in July that rising rates made MSRs attractive acquisition targets mid-year.

"The recent rise in rates has pushed expected lifetime speeds on 2012 and 2013 servicing into the single digits and closer to structural prepayment speeds," Matt Maurer, a managing director at MountainView Servicing Group, said at the time.

"With limited upside price potential and demand for MSRs still the highest we have seen in the last seven years, a lot of sellers feel it is a good time to bring a portfolio to market."

And bringing them to market is just what many firms did in the following months.

In October, Citigroup (C) announced plans to sell MSRs attached to $63 billion in loans, or about 21% of its total contracts at mid-year.

Interactive Mortgage Advisors oversaw several sales in 2013. One of the most recent being a sale of $4.3 billion in MSRs tied to Fannie and Freddie loans.

Mega servicers even got involved, with servicer Walter Investment Management Corp. (WAC) recently pricing a previously announced senior-note offering, with the firm selling $575 million in notes due in 2021. Proceeds from that offering will be used to acquire more MSRs.

The massive MSR sell-off was widely predicted in 2012. Back then, market analysts predicted a wave of sales conditioned on shifting interest rates and Basel III taking. effect. Basel III essentially implemented a different standard for calculating MSRs toward a financial institution's Tier 1 capital ratio.

Basel III stipulates that 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.  

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