Servicing: Don’t Underestimate LiquidityBy Rob Chrisman,
Rob Chrisman's Perspectives
Servicing values impact borrower pricing just as much as the mortgage-backed security market. Anyone interested in servicing follows recent pools, volumes of MSR (mortgage servicing rights) sales, and their attributes. The same reasons you’d want, or not want, to buy the MSRs on a pool of loans are pretty much the same reasons why an investor would bid up for it. The rates of the loans in the pool? LTVs? Foreclosure laws? Delinquency?
The slowdown in refinance activity over the last year has put pressure on profitability margins for originators that lack significant operational scale. Higher interest rates, and an exhaustion of borrowers who can, or would want to, refinance, have brought lower refinance volumes. The MBA application index is currently at an 18-year low with refinance volume accounting for an estimated 28 percent or roughly $451 billion in estimated full-year 2018 origination volume.
If rate and term refis have diminished, what about cash out refinances? National annual home price appreciation has slowed to a three-month running average of roughly three percent vs. six percent from one year ago but now means that over 95 percent of homeowners with a mortgage now have equity in their homes. Equity means the increased possibility of cash-out refinance and even though a smaller number of borrowers are refinancing, 75 percent of those doing so are electing cash-out transactions. Critics say we’re going back to the “using one’s home as a piggy bank” days. In today’s environment, underwriting standards are loosening and cash out refinance activity is increasing.
Those who are brokering servicing report that most buyers are targeting pristine portfolios from well-capitalized (more than $10 million of net worth) sellers. Small MSR packages ($300 million or less in unpaid principal balance) are trading at prices 10 to 20 basis points lower than the bid prices obtained on larger offerings. Why is that? There are different economies of scale, the acquisition cost is often the same whether big or small, and those legal and due diligence costs add up.
But MSR traders will tell you that the smaller trades that can often create the largest margins and in a quest for margin, larger buyers bid on smaller offerings but sometimes with a more rigid approach to price and term negotiations.
Who’s Doing What?
As is often the case, knowing what lenders, investors, and vendors are doing helps to describe the current market conditions. One hears that the usual buyers are active: Lakeview and Round Point for FHA/VA loans, New Residential Investment, Two Harbors, Pingora, and Round Point for conventional conforming, and Wells Fargo, Chase, and Redwood Trust for jumbo.
On November 1, NRZ raised approximately $433 million in common equity, completing nearly $2 billion of gross capital issuance since 2017. Analysts expect the capital will mostly be used to acquire new MSRs, particularly from smaller/midsize originators that need liquidity to support their operations.
Fannie Mae updated its policies in an off-cycle Servicing Guide Announcement adding a new vendor to its Third Party Sale Program; Requiring servicers to use a Fannie Mae-approved vendor for foreclosure sale marketing services in certain jurisdictions (refer to Third Party Sales Foreclosure Bidding Instructions as an additional resource); and Reminding servicers that they may submit payment changes with future effective dates starting on Oct. 28. For more information, view Announcement SVC-2018-07.
Fannie Mae is offering two new Investor Reporting eLearnings. Review the How Modifications Affect Investor Reporting and Resolving Failed Business Rules and Hard Rejects eLearnings for an overview on modified loans. Learn how they’re managed in Fannie Mae systems, best reporting practices, and more — all at your own pace. Visit the Servicing Training page for more information.
Freddie Mac’s Guide Bulletin 2018-19 announced updates to rental income requirements, documentation requirements for Social Security retirement and disability benefits, special loan-to-value/total LTV/Home Equity Line of Credit ratio requirements for a “no cash-out” refinance of a mortgage owned or securitized by Freddie Mac, concurrent transfers of servicing and requirements for settlement/closing disclosure statements.
MCT, a mortgage hedge advisory and secondary marketing software firm, announced the upcoming launch of MSRlive!, a web-based platform designed to effectively support lenders’ efforts to build, maintain and optimize their servicing portfolios. MSRlive! delivers highly accurate pricing for servicing portfolio valuations by automatically evaluating scenarios using more than 400 different factors that are fully customizable based on lender preferences. It was designed to be straightforward and easy to learn, simple to run (without the help of IT) and provide robust analysis. Detailed reports are also easily created, establishing the best possible servicing model for lenders’ specific business needs. Users can effectively forecast and manage their portfolios, predicting the impact of market shifts.
RoundPoint Mortgage Servicing Corp. has been selected as a subservicing partner for Bay Point Advisors, LLC., an Atlanta-based private lender providing small and medium-sized businesses with secured, mezzanine, bridge and DIP financing. RPMS services loans for a variety of Investment Banks, PE firms, hedge funds, mortgage banks, credit unions/CUSOs.
BSI Financial announced that it is purchasing mortgage servicing rights funded by a nine-figure cap raise that generated nearly three times the amount targeted. Lenders can elect to sell MSRs on either a bulk or flow basis. According to a release by BSI Financial: “By virtue of BSI Financial’s capital market relationships, lenders will enjoy accelerated cash flow and reduced risk that can arise when dealing with aggregators. Further, lenders that elect to subservice their loans with BSI Financial will reap additional economic benefits, efficiencies and flexibility that few other servicers can offer. Loans will be boarded on BSI Financial’s BSI ASSET360TM platform, which uses exception-based processing to spot data anomalies during loan boarding and over the life of the loan, reducing errors that may create compliance risk. The platform has the capability to view loan status, make one-time or ongoing electronic payments and request assistance if they are behind in their payments, triggering loss mitigation steps that are designed to keep the borrower in the property.”
Black Knight introduced LoanSphere Servicing Digital to help mortgage servicers deepen customer relationships and increase retention. According to their release: “LoanSphere Servicing Digital delivers detailed, timely and highly personalized information to customers about the value of their homes and how much wealth can be built from these real estate assets. A consumer-centric solution, this interactive tool gives customers the ability to easily perform tasks and find information related to their mortgages, while providing a platform for continual engagement between servicers and their customers.”
To wrap up, independent non-depository mortgage lenders have either been selling the majority of their MSRs to aggregators or conduits, or bulking up packages and selling them to the highest bidder. Regardless, lenders should know that there is an active market, and it makes sense to pay attention to who is doing what in this environment of tight margins and declining volumes.