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It’s official: American Capital buys Residential Credit Solutions

The mortgage servicing industry's "worst kept secret" is no longer a secret

In its third-quarter earnings filing, real estate investment trust American Capital Mortgage Investment (MTGE) said it signed definitive documentation to acquire mortgage servicer Residential Credit Solutions.

"RCS has an experienced management team with a fully-developed infrastructure and has obtained approvals from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Government National Mortgage Association (Ginnie Mae) to hold and manage mortgage servicing rights (MSRs)," stated the earnings, which confirmed what HousingWire first reported back in late September

"Subject to the satisfaction of the closing conditions set forth in the definitive documentation including regulatory approval, MTGE anticipates consummating the transaction in the fourth quarter of 2013," read the report.

American Capital reported net income for the quarter of $13.7 million, or $0.25 per share, and net book value of $22.37 per share. 

The purchase makes sense for several reasons, American Capital is moving its portfolio away from 30-year and into more agency 15-year and adjustable-rate mortgages and will benefit from the specialty servicing expertise at RCS.

"We are confident that our commitment to active portfolio management, our growing capabilities across the mortgage investment spectrum and our continued prioritization of risk management over short term metrics should help us to generate attractive returns for our shareholders over the long term," stated Gary Kain, MTGE's president and chief investment officer in the filing.

There are more acquisitions expected in the specialty servicing space. Other firms are seen adapting their business models to search for new lines of revenues as more people become current on their mortgages.

But more importantly, American Capital is moving into mortgage servicing rights investments with the purchase of RCS. The move is significant for two primary reasons. The first, in a rising interest rate environment, MSRs act as a hedge against risk to fixed-rate pools.

While American is moving away from the 30-year, it's investment portfolio remains comprised of $6.34 billion in fixed-rate investments. Longer duration portfolios would see values decrease as interest rates rise, without hedging.

Furthermore, supply is there. Coming Basel III requirements for the largest financial institutions in the nation mean that MSRs no longer count towards more rigorous tier-1 capital requirements. Banks, therefore are looking to offload huge MSR portfolios as a result.

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