![Housing-2021](https://www.housingwire.com/wp-content/uploads/2020/12/Housing-2021.png?w=1024)
With record origination volume stretching capacity and a fresh infusion of capital from the public markets en route, a slew of big nonbank lenders are shifting strategies and declining to sell their mortgage servicing rights, which they’d previously relied on to fund their operations.
In fact, roughly $70.8 billion in MSR transferred across the secondary market during the third quarter of 2020. That is the lowest total since 2015, according to Inside Mortgage Finance.
Rocket Companies, which went public in August and was valued at approximately $38 billion, disclosed to investors that it retains servicing rights on the vast majority of mortgages it originates in the U.S. It’s part of the company’s strategy to thrive in all market conditions.
When interest rates are low, Rocket can pump out a staggering volume of loans to borrowers. When interest rates rise, the value of MSR increases, which partially insulates the company from a slowdown in originations. (Industry-wide, MSR values have fallen by two-thirds over the last two years, primarily because of historically low interest rates and the effects of COVID-19.)
Rocket’s closest competitor in the lending game, Detroit-based United Wholesale Mortgage, is eyeing a similar thrive-in-all-conditions strategy.
“As we’ve been growing, we’ve had to sell servicing to continue to bring cash into the business,” UWM CEO Mat Ishbia told HousingWire. “Now I don’t have to do that. I can sell what I want to, not because I need to. Brokers will love the fact that we don’t have to sell servicing. That was the No. 1 question I got if you asked me one year ago what brokers wanted us to do differently.”
UWM, which is expected to go public at a $16.1 billion valuation in the fourth quarter once it merges with a Gores Holdings special purpose acquisitions company, has begun to dramatically reduce the amount of servicing it has sold. In 2019, Ishbia’s company sold $75 billion worth of MSR. As of Aug. 31, 2020, it had sold just $25 billion worth of MSR, despite being on pace to roughly double origination volume in 2020. Between September and October, it had sold just $1.2 billion in MSR, according to data from Recursion Companies.
And the wholesale giant intends to make it a prominent component of its long-term business plan, even if it isn’t accustomed to managing such a large portfolio.
“The company has regularly sold portions of its MSR portfolio to manage its balance sheet and raise liquidity, though additional sales are not expected until after 2021,” ratings agency Fitch pointed out in late October. Historically, UWM hasn’t been a top 10 servicer of government sponsored enterprises loans, but in the third quarter, UWM increased MSR from $924 million to $1.41 billion.
Caliber Home Loans, Guild Mortgage and Blackstone Group-owned Finance of America are three additional companies starting their public offerings that have prioritized retaining MSR, which on average yield about 30 bps per year.
But servicing is not an easy business, especially these days when there’s a run on experienced, high-quality back-office talent. Managing a servicing book during good times is a risk. Factor in a pandemic and high unemployment, and MSR neophytes could find themselves in trouble, even if delinquency to date has been relatively low.
“There’s always a conversation in the industry, whether it’s better to outsource or own the servicer piece,” said Christopher Whalen, an investment banker and author. “I would tell you that unless you’re really, really, really good, you would probably want to outsource it.”
Jack Micenko, a housing and mortgage analyst with Susquehanna Partners, said that servicing holds potential for lenders with solid tech stacks. Technology has allowed firms like Rocket and a select group of other independent mortgage banks to refinance their own books of business at 70% or better. More capital from public markets likely will lead to fewer MSR sales.
“I think it’s more positive than negative, in that retaining servicing increases your stream of cash flows,” Micenko said. “If I broker a mortgage of 2.75% or 3% and the 10-year goes up 25 bps, 30 bps, that customer is never refinancing away from me. So, they’ll only be on the books longer, which means the NPV value (net present value) of that loan is greater. So, my MSR asset is more. Servicing today is pretty interesting, because number one, you can harvest with some basic technology inputs, identify your servicing portfolio of who may be more likely to refinance than not. All I need is an automated valuation model and what their coupon is…then I’m sending them an email saying, ‘Hey, we think you’re a candidate for refi, click here to get the process started.’ That doesn’t cost me anything.”
To view the other forecast articles in this series, click here.
To read the full December/January issue of HousingWire Magazine, click here.