An offering of Fannie Mae and Freddie Mac mortgage servicing rights (MSR) linked to a loan pool valued at nearly $2.2 billion is now being marketed by the Prestwick Mortgage Group on behalf of an undisclosed independent mortgage banker, according to a bid document obtained by HousingWire.
The offering is yet another sign that the MSR market is continuing to heat up as the final quarter of the year unfolds. Bids for the $2.2 billion MSR package are due by Oct. 26, documents show. George Christo, executive vice president of Virginia-based Prestwick, declined to comment on the offering or to disclose the identity of the seller.
The MSR offering involves a loan pool of 4,201 Fannie Mae loans with an unpaid principal balance of $1.15 billion and 3,661 Freddie Mac loans with a total unpaid principal balance of slightly more than $1 billion. All 7,862 of the loans in the MSR loan pool are fixed rate with a weighted average interest rate of 3.001% and an average loan balance of $275,146, according to the bid documents.
The bulk of the loans to be serviced were originated in the Northeast — Connecticut, Massachusetts, Maine and Rhode Island. Hence the name of the MSR package being circulated by Prestwick — the “$2.2 billion New England FNMA/FHLMC Servicing Offering.”
MSR assets are 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, the servicer receives a small slice of the interest rate 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.
Another large MSR sale was put on the market in early October by Denver-based Incenter Mortgage Advisors — just as the fourth quarter was kicking off, as HousingWire previously reported. Incenter was then marketing two MSR packages by undisclosed sellers, with bids due October 5. One offering was for a $6.1 billion Ginnie Mae servicing portfolio and the other was for a $3.9 billion Fannie Mae and Freddie Mac loan-servicing portfolio.
In addition, Rocket Mortgage, a titan in the residential mortgage market, is reportedly set to market a $25 billion MSR package, according to a report by Inside Mortgage Finance, which attributed the information to three unnamed investment bankers. Although not yet confirmed, the report makes sense given Rocket that has been very active in the MSR market in recent months.
Detroit-based Rocket Companies Inc., the parent of top nonbank lender 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 billion — 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.
Inside Mortgage Finance reports that its tally of agency MSR asset transfers for the third quarter reached nearly $305 billion — based on the aggregate unpaid principal balance of the underlying loan pools. That is up from $169 billion the prior quarter, the publication reports — with the growth propelled by bulks sales like those being marketed by Prestwich and Incenter during the fourth quarter.
With interest rates expected to rise as the Federal Reserve taps the brakes on the economy to check inflation, transaction activity in the MSR secondary market is projected to remain robust — at least through the balance of the year, according to industry experts. MSRs for mortgages originated at lower rates in a rising-rate environment tend to have fewer prepayments because most refinancing options dry up. That makes well-underwritten, lower-rate MSRs more enticing for buyers.
“It’s a different time than 2005 or 2006,” said one investment banker with expertise in MSR transactions, who asked not to be named. “Mortgages today have fantastic underwriting and low LTVs [loan-to-value ratios].
“The market for MSRs now is very good, with lots of bidders and lots of options for sellers to sell at a price that is very good.”
That outlook was echoed by Azad Rafat, MSR senior director at Mortgage Capital Trading Inc. in San Diego. “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 said in a prior interview with HousingWire.
Another factor driving MSR sales in the final quarter of the year is the uncertainty ahead in the tax arena, according to Tom Piercy, managing director of Denver-based Incenter Mortgage Advisors.
“The MSR market has definitely heated up,” he said. “Incenter is currently managing several deals on behalf of sole-proprietor LLCs who want to sell MSRs before year-end due to the expected increase in the capital gains tax and ordinary income rates.”