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Throughout late 2022 and all of 2023, a large number of mortgage servicing rights (MSR) blocks were sold and bought. This is somewhat troubling, but understandable. Troubling because many lenders retained servicing during the heady days of 2020 and 2021, choosing not to sell it to the aggregators/correspondent investors, but have since needed the infusion of cash in the last several months to cover their losses. After all, what assets of value do independent mortgage banks (IMBs) really own besides mortgage servicing rights (MSRs)? So now what? Here are some things to consider when deciding whether to sell your servicing rights in today’s market.
Smaller independent mortgage bankers (IMBs), but also banks and credit unions, added servicing three to four years ago because aggregators weren’t paying for it, and instead sold the loans to Freddie Mac or Fannie Mae and retained the servicing rights, or issued Ginnie Mae securities. The value of servicing rose as interest rates did since “rate and term” refis vanished and the servicing asset would be on their books longer. The monthly income from servicing loans kept many companies afloat in 2023, but some found that it was not enough and opted to sell blocks to expand capital, or at least outlast their competitors with declining or leveling off margins and volumes.
The buyers of MSRs are focused on the same things that anyone would be, especially if the loans were funded months or years ago.
Servicing has different values for different owners, especially if a company is trying to retain the customer.
With $2 trillion outstanding in securities, it is worthwhile to look at the “Top 10” Ginnie Mae servicers, primarily FHA and VA loans. Leading the pack at the end of 2023 was Lakeview Loan Servicing with $300 billion, followed by Freedom Mortgage, Pennymac, Newrez LLC, Nationstar, Carrington Mortgage Services, Quicken, Wells Fargo, Planet Home Lending, and United Shore Financial Services. Nine of the Top 10 Ginnie servicers in 2023 were non-depositories, and all saw annual gains in servicing book size in 2023, with growth rates ranging from 7% to 60%.
Of course, you can’t have servicing without originations. Recursion analysis of Ginnie Mae data by the MBA shows that non-depositories accounted for about 60% of total mortgage originations in 2022, having grown from a 30% to 40% market share a decade earlier, based on the most current available data from the Home Mortgage Disclosure Act (HMDA). (It will take a few months to tabulate 2023 numbers.) Government lending played a big part in this growth: FHA and VA originations accounted for 21% of total origination units and 19% of total dollar volume in 2022. Non-depositories accounted for 87% of FHA originations and 81% of VA originations in 2022.
A higher market share of government originations has led to a higher share of government servicing. In other words, lenders who are familiar with originating the product are more comfortable servicing it … or buying blocks from elsewhere. Data from the MBA showed that lenders with a majority government share of originations retained servicing on an average of 36% of their origination volume. In comparison, lenders with less than 50% government volume retained servicing for an average of 18% of their origination volume in the third quarter of 2023. Will the non-depository share of Ginnie Mae servicing continue to increase? Given their growing market share of government loan originations and the proposed increase in capital requirements for banks holding mortgage servicing rights, it seems likely.
For conventional conforming production that pass-through Freddie Mac and Fannie Mae (the GSEs, or government sponsored enterprises), large servicers (both banks and nonbanks) increased their market share during the fourth quarter of 2023. Inside Mortgage Finance tabulates that the GSE servicing share among large independent mortgage banks rose slightly during the fourth quarter of 2023, as did the bank servicing share, which is around 13%. Chase Home Finance remained the nation’s largest GSE servicer with $587 billion, a 10% increase from a year ago. Coming in a distant second was Wells Fargo whose servicing volume fell 6% to $441 billion.
The top 50 servicers in the business held $9.3 trillion in owned servicing at the end of last year, according to a new ranking and analysis by Inside Mortgage Finance. Twenty-seven of those servicers were nonbanks, which held a combined $5.1 trillion of owned servicing, or 55% of the total for the top 50. Nonbanks have been growing their share of the market for years; nonbanks in the top 50 built their portfolios by 7.3% since the end of 2022. A big chunk of the nonbank gains came through secondary-market acquisitions.
The value of servicing is the net present value of the servicing revenue components, less expenses, adjusted for prepayment speeds. So, if expenses increase, or the income decreases, it is a problem. In terms of the monthly accounting, the primary source of servicing cash flows is from the strip of interest (25 basis points for conventional loans, 19 to 69 basis points for government loans) from the loan earned by the servicer and, based on the accounting rules, becomes an MSR asset when a mortgage loan is sold and servicing is retained. In exchange for the servicing strip, mortgage servicers are responsible for the collection of payments on the mortgage loan and the distribution of these payments to the appropriate authority (including investors, tax authorities and insurance companies).
While the majority of the cash flows, and therefore value of the MSR asset, is driven primarily by the strip of interest, the servicer also can earn income from late fees, ancillary income, and float income.
Anyone in the business knows that servicing is a numbers game. Simply put, if it costs a servicer $10 a month to service a loan and the servicer is paid $50 a month to do so, it is a source of revenue. The longer the loan is “on the books,” the better. Originating or buying servicing and valuing it as if you’ll own it for years, only to have it pay off (prepaying) in four months, is a money-losing situation. Refinancing removes the cashflow and possibly the customer relationship.
Some servicers and lenders, rather than hiring a third-party vendor to hedge servicing, use “recapture” as a simple/production hedge. This involves a direct-to-consumer (DTC) department to call on the borrowers in the servicing portfolio before competitors can refinance them. Lenders, however, have had operational capability issues, compliance concerns, and accounting nuances that can create problems.
When a lender sells the servicing rights, they shouldn’t be surprised that the buyer will aggressively market to those borrowers to retain them. In other words, if Mr. Cooper buys a $100 million package of servicing for one point, or $1 million, management wants to protect that $1 million investment by being in front of the client with products and services.
The realm of servicing in the mortgage industry is complex and filled with opportunities and challenges. Further, STRATMOR’s deep knowledge and extensive industry expertise have helped numerous lenders navigate the complex business of servicing transfers through due diligence, operational audits, strategic advisory, data management and more.
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