MSR market is partying like it’s 2006

Rising rates, significantly lower mortgage prepays, and ample demand have driven MSR values to the highest levels in 15-plus years

HW+ House Money

The mortgage servicing rights market took off like a rocket in January and it has continued to accelerate into the stratosphere in February, according to industry experts who follow the MSR market closely.

About $180 billion in residential bulk MSR assets were brought to market just in the month of January, “and February will be another huge month as well,” according to Michael Carnes, managing director of the MSR valuation group for New York-based Mortgage Industry Advisory Corporation (MIAC). “This is nearly three times the monthly average witnessed in 2021,” he added. 

Carnes said MIAC has at least six MSR offerings currently now in motion for February valued north of $10 billion, adding “that’s just what we have actively in the pipeline now.” 

“We closed a $10 billion deal not long ago,” he said. “Next, we might be working on $30 billion or $40 billion [in MSR deals]. You just never know. I think it’s going to stay this way for a while.”

Carnes added that he is seeing many players active in the MSR market right now, including private-equity funds and real estate investment trusts (REITs). 

“There’s a lot of new money now, which is a good thing, because with the volume we’re seeing, you want to know the demand will be able to keep up with the supply,” he said. “And, so far, it is.”

In addition, Carnes said there are plenty of lenders now sitting on “substantial amounts of [MSR] cushion” that they can’t effectively tap unless they sell the assets. “So that’s going to continue to drive the activity as declines in origination volume and declines in margins in general cause [lenders] to want to sell some of their MSRs just to meet earnings targets,” Carnes said.

Bill Shirreffs, head of MSR services and sales operations at San Diego-based Mortgage Capital Trading, agrees with Carnes’ bullish assessment of the MSR market. He said the outlook for MSR assets “remains very strong, driving [price] multiples to very attractive levels for prospective sellers.”

“As a result of a combination of declining origination volume and margin pressure, we anticipate that many MSR asset holders will take advantage of these favorable conditions in the near term,” he added. “Overall, the bulk MSR market should be incredibly robust throughout 2022.”

Denver-based Incenter Mortgage Advisors’ managing director, Tom Piercy, said he expects the exuberance in the market to continue, too, so long as interest rates are rising and the Federal Reserve remains committed to a hawkish position on rates in the year ahead as part of an effort to calm spiking inflation. 

Incenter completed a dozen bulk MSR sales transactions in January involving MSRs for agency-backed loan pools that together had a total unpaid principal balance of $113.2 billion, which is close to what Incenter historically has sold in an entire year

Piercy said Incenter earlier in February put out to bid an $11.5 billion Fannie Mae/Freddie Mac bulk servicing offering that is expected to close this week. In addition, Piercy confirms that Incenter has another $13 billion MSR offering in the pipeline that is expected to be released as soon as this week.

“February appears to be another strong month,” Piercy said.  “In addition to the aforementioned $24.5 billion [in MSR offerings], we are going to release another $13 billion [MSR offering] next week and another $40 billion in multiple deals before month end.”

As far as the MSR cushion Carnes described, rankings provided by New York-based mortgage-data analytics firm Recursion shows the leading agency MSR servicers as of year-end 2021 were San Francisco-based Wells Fargo; Detroit-based Rocket Mortgage (formerly Quicken Loans); Westlake Village, California-based Pennymac; New York-based J.P. Morgan Chase; and Mount Laurel New Jersey-based Freedom Mortgage

Wells Fargo’s agency MSR portfolio — including Fannie Mae, Freddie Mac and Ginnie Mae loan servicing — stood at $641.9 billion, or 8.2% of all agency loans serviced, as of December 6 of last year, according to the most recent data available from Recursion. Carnes of MIAC points out, however, that although banks are opportunistic about selling MSRs, he also said the assets are valuable for them to hold because they offer cross-selling opportunities that aren’t available to non-depository institutions.

“There’s a lot of reasons for selling MSRs, including tax advantages,” Carnes explained. “But owning MSRs in areas where they [banks] have branches effectively gives them access to thousands of potential customers that they can offer credit cards, savings accounts, checking accounts and whatever other offerings the bank might have.”

Trailing Wells Fargo in MSR market share as of year-end 2021 was Rocket Mortgage, with a $481.4 billion agency MSR portfolio and a 6.2% market share. Next in line was Pennymac, at $479.3 and 6.2%; J.P. Morgan Chase, $387.5 billion and 5%; and Freedom Mortgage, $365.4 billion and 4.7%. 

Overall, as of December 6, 2021, Recursion’s data show banks controlled 33.2% of the agency MSR market while nonbanks controlled 66.8%, based on the $7.8 trillion in unpaid principal balance of agency loans being serviced by lenders.

Among the MSR leaders, only Wells Fargo recorded a decrease in its MSR portfolio size year over year — a $128.8 billion decline from year-end 2020, when its MSR portfolio stood at $770.7 billion. Freedom Mortgage recorded the biggest jump in its MSR portfolio over the same period, with a $108.3 billion increase, up from $257.1 billion as of year-end 2020. 

MSR portfolios are affected by loan prepayments, MSR sales and purchases, and MSRs tied to new agency loan issuance. 

In the case of Wells Fargo, for example, agency loan issuance with retained servicing declined from $165.6 billion in 2020 to $138.4 billion in 2021 through November 6. The bank also has been a net seller of MSRS in recent years, posting MSR net sales totaling nearly $2 billion combined for 2020 and 2021 — and $20.9 billion for 2019. Wells Fargo also recorded the largest volume of prepayments among the top MSR lenders — $294.3 billion in 2020, and $208.8 billion last year through November 6, according to Recursion.

By contrast, Freedom Mortgage was the largest net purchaser of agency MSRs in 2021 through December 6, at $147.8 billion, up from $60.9 billion for the year-earlier period. In terms of net MSR sales, Quicken Loans led the pack last year, at nearly $112 billion year to date through December 6, 2021. Quicken also posted the largest agency loan issuance mark in 2021 through November 6, at $316.5 billion, up from nearly $294 billion in 2020.

“Political tension, the Russia and Ukraine conflict, inflation, I can go on and on,” Carnes said when asked to address potential headwinds facing the MSR market. “It makes it nearly impossible to precisely predict where rates will end in 2022.” 

Carnes added that some may argue the sudden surge in MSR values and sales is “too much, too fast.” Regardless, he said that hasn’t stopped buyers from paying “five times and greater multiples for certain agency offerings.” 

“Rising rates, significantly lower [mortgage] prepays and ample demand have driven MSR values to the highest levels since before the financial crisis [of 2007/2008],” Carnes said.

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