Investments Lending

MBA Secondary: Experts see cause for optimism in MSR market

But keep an eye on corporate tax rate changes

Crystal ball

Compared to the state of the MSR market this time last year, experts on a panel about MSR liquidity at the MBA Annual Secondary Conference on Monday saw reason for optimism in 2017.

The panel included David Bennett, managing director of MountainView Capital Holdings, Vandad Fartaj, managing director and chief capital markets officer at PennyMac, Garry Cipponeri, founder, president and CEO of TradeRoom Capital Servicing Exchange, and Seth Sprague, executive vice president of Phoenix Capital.

All agreed that their sense of cautious optimism was in contrast to the dismal state of MSRs in 2016.

“2016 was a year of challenges,” Sprague said. “Liquidity was softer in 2016, but it has improved in 2017. It is a much more positive time in the MSR world with more potential buyers.”

The panel took a deep dive into the challenges of MSR liquidity, with a particular focus on Ginnie Mae. Here are some highlights:

Hedging

In the new rising-rate environment, people are getting reacquainted with hedge losses, and several panelists shared the questions they get from clients around hedging.

The bottom line, according to Bennett: When considering whether to hedge or not to hedge, the right question to ask is what risk are you trying to take off the table when hedging?

A close second: Do you like your job? (If so, then hedge).

Ginnie Mae MSR liquidity

When it comes to judging the liquidity of GInnie Mae MSRS, it depends on what part of the market you focus on.

“We generally disagree that there is a lack of liquidity for MSRs,” Fartaj said. “If you’re focused on the co market than you could make a case that there’s not much liquidity in the market, but if you look at the market more broadly, that doesn’t make sense. Whole loan execution is stronger today that at any time I’ve ever seen it.”

Another issue that affects liquidity is certainty. “If you don’t have data you are going to model the MSRs conservatively,” Sprague said. “The unknown element is impacting the liquidity of servicing.”

The panelists recognized the importance of a new platform for Ginnie Mae MSRs that PennieMac spent 15 months developing with Ginnie Mae and Credit Suisse.

“We issued $400 million in three-year term notes through this structure to ABS investors. This platform gave us an opportunity to get some leverage on the asset up to a 60% advance rate, and terms were very comparable to our warehouse facility financial terms,” Fartaj said.

“This is a watershed moment for mortgage banking industry. For nonbanks in general the most important thing for them is financing the MSRs, so creating an MSR that does not rely on bank warehouse facilities is very significant for the market. This is the single-most important thing we’ve gotten done in the last year or two,” Fartaj said.

Citi’s exit from the mortgage servicing space

Citi is a great company, but we shouldn’t use them as a bellwether of MSRs,” Cipponeri said. “Their costs were high, and reductions even higher. Because of past issues they had a lot of duplicative efforts. It was a shock to the industry, but not a sign of things to come.”

Basel III

The panel agreed that the Basel III accords have ended up corralling banking entities that were probably not the original targets of the accord. They also don’t see quick relief coming from the new administration.

“Post election, I think the industry thought Trump would just tear up Basel III, but that’s clearly not happening,” Sprague said. He also warned that Trump’s proposed changes to the corporate tax rate could actually be detrimental under Basel III.

“MSRs for corporations is net of deferred tax liability. Cutting the corporate tax rate to 15% is a potentially huge game changer to the MSR market,” Sprague said. “A corporate tax rate change without a change in Basel III could have a negative impact on MSRs and the amount of capital it’s going to attract. This would be one of the unintended consequences of corporate tax change.”

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