The secondary market for mortgage servicing rights, or MSRs, has been heating up recently as interest rates tick up, increasing the value of MSR assets, and as other revenue streams for lenders begin to slow — such as loan refinancing.
It’s also the time of year that many nondepository lenders, also called nonbanks, typically will look to sell off some of the MSR assets on their books to bolster liquidity for future endeavors. Those are normal market dynamics, according to Azad Rafat, MSR senior director at Mortgage Capital Trading Inc.
MSR assets aren’t complicated in conception. They are simply the loan-servicing component that goes along with any mortgage — collecting taxes, interest and principal payments, and forwarding that revenue stream to the appropriate parties, in exchange for a small cut of the interest on the mortgage. And those servicing rights, with a revenue stream backed by the underlying mortgage, can be packaged, bought and sold like any other asset or security.
“We’ll see a lot of companies gear up to start selling some of their MSR portfolio in the third and fourth quarters to generate cash for operations and to put themselves in a better position to continue to originate new loans, and for other financial needs,” Rafat says.
There is no easy way for the general public to track pending secondary-market sales of MRS assets, Rafat explains, absent deep data-diving skills and access to pricey subscription services. Consequently, the MSR market can appear opaque to many, but deal details do surface from time to time through public-record filings, circulating bid documents and word-of-mouth.
Tom Piercy, managing director of Denver-based Incenter Mortgage Advisors, has a slightly different take than Rafat on the pace of recent MSR asset sales — which are usually tied to government-backed loans.
“We’re not seeing as much activity as anticipated, but that’s because there are a lot of people who thought that the smaller to midsize mortgage banks who retained servicing for the last 16 to 18 months were going to start cashing in on it, and they’re not [at the level expected],” he explained “They’re holding onto them [because interest rates are going up], and they [MSR assets] are performing well, plus you have tax consequences [after selling them].”
He adds that there are many variables involved that can affect secondary market MSR sales. But he says the deals that are coming through the pipeline tend to be “larger deals.”
In fact, Incenter is currently marketing two MSR offerings with bids due Oct. 5. One offering now in circulation is for a $6.1 billion Ginnie Mae servicing portfolio and the other is for a $3.9 billion Fannie Mae and Freddie Mac loan-servicing portfolio.
On another front, Detroit-based Rocket Companies, the parent of nonbank Rocket Mortgage, disclosed two MSR deals in its second-quarter 2021 quarterly earnings filing with the Securities and Exchange Commission. The lender reveals in a footnote in the SEC filing that shortly after June 30 of this year it sold off MSRs assets with a total unpaid principal balance of $35.3 billions — or 7.6% of its entire single-family MSR portfolio. Then, in July, it purchased a batch of MSR assets with an aggregate unpaid principal loan balance of $3.6 billion.
The fair market value of the MSRs sold in the initial sale was $373 million while the MSR assets the nonbank later purchased had a fair market value of $38 million, the SEC filing states. Further details on the MSR assets were not revealed in the SEC filing, and Rocket did not reply to an email seeking comment.
Another recent large MSR asset sale was undertaken recently by Ann Arbor, Michigan-based Home Point Financial (Homepoint), the third largest nonbank wholesale lender nationally, per Fitch Ratings, and a subsidiary of Home Point Capital. A recent SEC filing by the lender reveals that in early September it hauled in $122.3 million on the sale of servicing rights for a $10.8 billion portfolio of single-family mortgage loans “serviced for the Government National Mortgage Association,” or Ginnie Mae.
Additionally, the trade publication Inside Mortgage Finance reports that Home Point is now in the market seeking to auction off another $15 billion worth of MSR assets. The MSR sales come on the heels of Home Point posting an unexpected $73 million loss in the second quarter.
Brad Pettiford, director of public relations for Homepoint, declined to comment on the $15 billion offering reported by IMF, other than to refer to a statement the company’s chief financial officer, Mark Elbaum, made during a second-quarter 2021 earnings call.
“In connection with Home Point Capital’s ongoing efficiency and capital management initiatives, we are assessing potential selective sales from the Company’s MSR portfolio, including Ginnie Mae MSRs,” Elbaum said. “We believe any such sales would enable us to become a more efficient agency-focused servicer, and also provide us with incremental liquidity that we could use to reduce our debt.”
The Ginnie wildcard
There does seem to be a lot of MSR market activity of late. And, as Piercy said, many are larger deals.
There is a wildcard lurking on the horizon, however, at least with respect to the market for Ginnie Mae MSRs.
The government-sponsored enterprise’s role in the market is to guarantee the timely delivery of bond payments on securities it issues, but not the underlying loans backing those securities. Those loan-level guarantees come from other federal affordable-housing programs.
Here’s the rub.
In July, Ginnie Mae issued a Request for Input (RFI) laying out plans to bolster financial requirements for issuers and servicers of the securities it guarantees. The comment period was originally set to expire in early August but has since been extended to Oct. 8 of this year, after which Ginnie Mae is expected to publish the final rules — or possibly suspend action.
In the meantime, Ginnie Mae issuers and the holders of the mortgage servicing rights are in waiting mode — some no doubt on pins and needles.
The three-part Ginnie Mae proposal calls for bolstering net worth and liquidity standards for nonbank issuers and holders of Ginnie MSRs, which the industry generally agrees are workable standards — with a few tweaks. The third part of the plan, however, would impose what many industry leaders and experts see as overly onerous “minimum risk-based capital” standards for nonbank lenders engaged with Ginnie Mae loans and servicing rights.
Nonbank industry groups and policy experts warn that the contemplated risk-capital standards are potentially damaging to the Ginnie MSR market and ultimately homebuyers — particularly first-time homebuyers and military veterans who benefit from Ginnie Mae’s mortgage-backed bond guarantees.
Ginnie Mae backs the securities issued against mortgages that are in turn guaranteed by the Federal Housing Administration, a go-to program for many first-time homebuyers; the Department of Veterans Affairs; the Department of Rural Housing Service; or HUD’s Office of Public and Indian Housing.
In other words, Ginnie plays a crucial role in helping many first-time, underserved and credit-challenged homebuyers obtain mortgages, so they have an opportunity to build future wealth through homeownership. That also means the securities Ginnie Mae guarantees are backed by loans that also tend to have higher default rates than conventional loans.
“On average, Ginnie Mae loans’ average delinquency rate is about twice as high as conventional loans,” Ahamd says. He adds that it varies by region and state, however.
For lenders servicing those loans — the holders of the MSRs, a market now dominated by nonbanks — that creates some added risk. That’s because lenders holding Ginnie Mae mortgage servicing rights are responsible for ensuring timely payments are made to Ginnie Mae bondholders. And when loans go unpaid due to default, the lenders still have to cover the payments to the bondholders — though over time they can recoup those costs. Still, it can create cash-flow stress for the lender.
That requirement, coupled with the proposed addition of the risk-based capital requirements contemplated by Ginnie Mae, is enough to spark concern in the market that nonbank lenders faced with any liquidity concerns will be inclined to sell off their Ginnie Mae MSR assets — potentially leading to a concentration of Ginnie MSRs among a few lenders and ultimately a distorted market.
“If you look at [a nonbank’s] balance sheet, the majority, the largest asset on their balance sheet is either cash or MSRs,” Incenter’s Piercy says. “And many do not like to keep cash on the balance sheet because it’s a nonworking asset.”
A letter dated August 9, 2021, sent to Ginnie Mae’s acting executive vice president, Michael Drayne, penned by Robert Broeksmit, president and CEO of the Mortgage Bankers Association, describes the stakes over the proposed risk-based capital standards this way: “MBA fears that its implementation, as proposed, could reduce issuer participation and diversity, severely undermine market demand for Ginnie Mae MSRs, reduce aggregator demand for government-insured or -guaranteed loans, and lead to higher interest rates and diminished access to credit for consumers.
“This outcome would be particularly problematic,” Broeksmit adds, “given the low- to moderate-income, veteran and rural homebuyers predominantly served by the loans backing Ginnie Mae securities.”
Not everyone agrees with the MBA’s take, however. The Consumer Bankers Association, whose members are retail banks, sent a letter of comment to Ginnie Mae in support of implementing risk-based capital standards for nonbanks.
“CBA applauds Ginnie Mae’s acknowledgment of the need for risk-based capital requirements for nonbanks, which would bring their requirements more in line with the regulatory scheme banks have long adhered to for consumers’ protection and for the safety and soundness of the financial system,” the association’s letter states.
Piercy says there is concern within the marketplace that “there may not be any flexibility from Ginnie Mae on the risk-based capital proposal.” But he also stresses, again, that there are a host of variables and nuances affecting the MSR secondary market at any given time, including recent MSR sales.
Still, Ginnie Mae policy is clearly one of them.
“What some lenders are saying is, ‘I don’t even want to worry about it. So, I’m going to pare back my Ginnie Mae holdings,’” Piercy says. “So, we now have this potential issue, [and their thinking is] let me sell now while I don’t have the pressure, right, versus all of a sudden.”
Rafat of Mortgage Capital Trading agrees that if the proposed Ginnie Mae risk-capital rules go into effect as proposed, they would likely “create a major shock to the system.”
“It will push many borrowers into nonagency loans [non-government guaranteed] with higher interest rates, and that will be more costly for the borrowers,” he adds. “That’s a possibility.”
Rafat adds, however, that it’s just as likely that there will be another outcome.
“We could see a potential backing-off on this one as well,” he explains. “Ginnie Mae may not come out and say, ‘We’re done with it, and we’re backing off completely.’ But they may say, ‘We’re going to suspend this for the time being, and revisit it later.’”