The tailwinds, however, also are strong, with a high level of investor interest in acquiring MSRs, which are seen as solid, relatively safe investments. That demand means now is an opportune time for smaller, struggling independent mortgage banks (IMBs) to sell MSRs to manage cash flow and their balance sheets as pricing is likely at a high point in the market.

“I would say a $1 trillion-plus year [for MSR trading volume in 2023] is not a bad estimate,” said Mike Carnes, managing director of the MSR valuation group at Mortgage Industry Advisory Corp (MIAC). “The prime time for getting a deal in the market would probably be this month or next month. 

“People are trying to get their deals done before the end of the year, so what a lot of them will do is they’ll get their deals out now with the intention of closing the deal by November.”  

For bulk public auctions alone, MIAC since the start of the second quarter this year has brought to market a total of seven MSR agency offerings valued at nearly $11 billion based on loan-portfolio balances, with three of those deals going to bid this month, according to Carnes. He said MIAC has overseen another $40 billion in MSR offerings via private deals.

Tom Piercy, managing director of Incenter Mortgage Advisors, agrees that MSR trading volume by year’s end should be in the $1 trillion range. He said there was a “tremendous amount of volume” in the first half of the year, adding that there was a bit of a slowdown in MSR trading volume in the third quarter of this year.

Incenter has overseen 10 bulk agency MSR public offerings since the start of the second quarter of this year valued at nearly $76 billion based on loan-portfolio balances.

“I would say 50% to 70% of our deals are done now on a negotiated nonauction basis,” Piercy said. “In a span of about six weeks [earlier this year], we did multiple trades that totaled in excess of $100 billion.”

The bulk of MSR trades to date have involved legacy loans with “a sub-4% WAC” [weighted average coupon], Piercy said. Carnes noted that most of the outstanding mortgages nationwide “now have an interest rate of 4% or less.”

“My concern is ultimately these low WAC deals … how much of it is really left [to trade]?” Piercy added. “We’re at [roughly] 30%, of where we were two years ago in the number of [new mortgage] units being originated, so that’s going to dry up [the legacy MSR trades] and then you’ve got this low [new-loan origination] volume. 

“I’m very concerned with where the volumes will be 12 months out that will satisfy some of these objectives for these MSR investors. And that’s a headwind for the market.”

Nick Smith, founder, managing partner and CEO of Minneapolis-based private-equity firm Rice Park Capital Management, an active MSR buyer, agrees that many of the MSRs tied to low-rate legacy loans are going to be purchased by new owners who are willing to own them for a long time. That means they will not be traded again any time soon.

“Right now, a lot of them [MSRs for legacy loans] are controlled by transitional owners, which are the IMBs that originated them in 2020 and 2021, and now they’re looking to unload them,” Smith said. 

Unlike Piercy, however, Smith is far more bullish on the staying power of the legacy loan MSRs. He points out that the total supply of legacy loan MSRs is in the range of $6 trillion — a byproduct of the great refinancing boom in 2020 and 2021.

“There’s trillions of it left [to trade],” he stressed. “I mean, 74% of the market refinanced in two years, and there’s maybe only $2 trillion to $3 trillion that’s traded in the last few years. 

“That means there’s still roughly half of it that’s left to go, and that’s in addition to just the normal production that’s being produced now.”

Amortization

Azad Rafat is senior director of MSR services at Mortgage Capital Trading (MCT), which provides advisory and brokerage services primarily for smaller MSR deals — typically less than a $1 billion. He said the smaller MSR deals involve sellers that are generally the group most impacted by the higher interest rates that have devastated origination volumes since early last year, and many are selling MSRs to make ends meet.

Since the start of the second quarter, a total of at least 10 bulk agency MSR public offerings valued at $5.3 billion have been brokered by MCT and/or its partner Prestwick Mortgage Group. Rafat said MCT tends to serve smaller IMBs.

“Most of the companies during this year and toward the end of last year, they started releasing more MSRs than they retain,” Rafat said. “Typically, we see for the industry average about 30% [MSR] retention and 70% released [or sold]. 

“However, some IMBs are literally releasing 90% to 100% of their [MSR] production.”

Rafat said for these lenders, the value of the remaining MSRs held in portfolio starts to be impacted negatively — if not replenished — due to natural runoff from prepayments and also from the impact of amortization.

“Literally, every other week we have different clients come to us and say, ‘What has happened in my portfolio [because it’s losing value]?’” Rafat explained. “They’re not adding enough [MSRs] to replenish the paydown from principal payments along with regular prepayments [due to death, divorce and relocations, etc.] 

“Every single principal payment that comes in increases month over month [while the share going to interest decreases], so you have a passive, natural principal amortization just by the borrower making regular payments. So, it’s not benefiting the overall MSR portfolio that they have on their books.”

Rafat added that he is seeing smaller IMBs trying to manage their MSR portfolios, “and some of them are thinking about exiting [the market] completely.”

“Definitely a lot of them are facing financial stress,” he added, “and we are also getting inquiries from IMBs looking for other IMBs to acquire.”

MSR investors

Rice Park Capital’s Smith said the MSR buyers in the market now include private investor groups that simply own MSRs and are seeking to expand their portfolios. They include Smith’s firm and other major investors like Annaly Capital Management, Grandeur Peak Global Advisors, Seneca Mortgage Investments and Marlin Mortgage, among many others. 

In addition, another class of MSR buyers are what Smith describes as “hybrid investors,” which “both create mortgages, and they invest in mortgages,” including MSRs. They include players such as Lakeview Loan Servicing (a member of the Bayview Companies), Pennymac, Mr. Cooper, Rithm Capital and Two Harbors Investment Corp.

A third group of MSR buyers (and sellers) are traditional IMBs, “which are in the business of making loans and selling them off to the market,” Smith said. They include large mortgage lenders like United Wholesale Mortgage (UWM), CrossCountry Mortgage, loanDepot and Movement Mortgage as well as a host of smaller IMBs with a few billion dollars of origination annually or less — many of them just hanging on for survival until the market improves.

“And I think that group is in a little bit of a limbo because they aren’t making money off originations generally, and as an industry they’re [IMBs] losing money,” Smith said. “They’re net sellers of MSRs to the market. 

“So, they’re just on a treadmill in which they make loans, … and they sell them off [including MSRs] into the market, and until the market turns, they’re going to have a hard time making money.”

The banks

Smith added another major group in the MSR market is the banks, which as a group, he said, have “flat or shrinking” MSR portfolios, “with the exception of maybe Chase [JP Morgan].”

Bank agency MSR holdings totaled $2.78 trillion in 2018, according to data provided by mortgage-data analytics firm Recursion. As of September 2023, bank agency MSR holdings stood at $2.75 trillion — essentially flat. For IMBs over the same period, according to Recursion, MSRs holdings increased from a total of $3 trillion to $5.8 trillion, up some 92%.

An example of a major bank that has been shrinking its MSR portfolio this year is Wells Fargo, which went from being the top holder of all-agency MSRs as of June of this year to No. 4 as of September, according to Recursion. Ranking ahead of Wells now are Lakeview Loan Servicing, Pennymac and JPMorgan.

Wells Fargo’s MSR third-party servicing portfolio shrunk from $666.8 billion as of March 31 to $609.1 billion as of June 30 in the wake of a selling a $50 billion block of MSRs, U.S. Securities and Exchange Commission filings show. The buyer, according to industry sources, was Mr. Cooper.

“During the first quarter, we successfully marketed mortgage servicing rights for approximately $50 billion of loans serviced for others that we expect to close later this year,” Wells Fargo Chief Financial Officer Mike Santomassimo said during the bank’s Q1 earnings call. “We will continue to look for additional opportunities to simplify and reduce the size of our servicing business.”

Smith said based on the public comments that Wells Fargo has made about looking to curtail their servicing portfolio, “I think it’s reasonable to expect they’re going to keep doing that until they trim their portfolio to the size that makes sense for them.” 

“They didn’t say how much they would sell,” he added, “but I think by deduction the number that they have to sell is much larger than what has been sold so far.”

Piercy stressed, however, that banks remain opportunistic MSR buyers, focused on conventional Fannie Mae and Freddie Mac MSRs, while IMBs continue to dominate in the Ginnie Mae sector — which involves higher-risk loans.

“The MSR asset itself for a bank is really attractive because what does it do?” Piercy explains. “It gives them access to customers via recapture capabilities, but as importantly it’s a source of low-cost deposits.

“Those escrow balances are worth something now, which they hadn’t been for years. You’ve got escrow balances [for taxes and insurance] now that earn upward of 5%, if not more, So there’s a tremendous amount of value of the MSR asset to a depository.”

Recursion’s most recent MSR market report, current as of September 2023, provides the following information on lender MSR rankings for both banks and nonbanks.

• All-agency MSR ranking based on holdings and market share: 

1. Lakeview (7%); 2. Pennymac (6.6%); 3. JP Morgan (6.2%); 4. Wells Fargo (6.2%); 5. Mr. Cooper (5.8%)

• Freddie Mac MSRs: 

1. JP Morgan [10.4%]; 2. Wells Fargo (6.8%); 3. Mr. Cooper (5.8%); 4. Pennymac (5.2%); 5. Rocket Mortgage(4.4%). 

• Fannie Mae MSRs: 

1. Wells Fargo [6.9%]; 2. JP Morgan, (6.5%); 3. Rocket Mortgage (6.4%); 4. Mr. Cooper (5.8%); 5. Lakeview Loan Servicing (5.4%).

• Ginnie Mae MSRs: 

1. Lakeview Loan Servicing (13.5%); 2. Freedom Mortgage (12.4%), 3. Pennymac (11.6%); 4. Mr. Cooper (5.7%); and NewRez/Rithm Capital (5.6%).