A small group of larger players is dominating in the mortgage servicing rights market and they are paying prices for MSRs that vary increasingly widely by participant and loan type.
That was among the takeaways from industry panelists analyzing consolidation and regulation in the market at Information Management Network's Mortgage Servicing Rights Forum in New York on Thursday.
The relatively less-efficient cost structures of more moderate-sized players have made it tough for them to compete, noted Ken Adler, a managing director at Annaly.
Despite the recent return of profitability to mortgage bankers overall, more moderate-sized mortgage companies' strains persist as a concern not only for them but also for MSR purchasers subject to counterparty risk from their sellers, Adler said
That counterparty risk has been high in some cases because third-quarter earnings suggest mortgage rates were low enough to prompt servicing writedowns without providing enough offsetting origination profit, even for some large companies, panelists said.
That means many sellers still are motivated by financial concerns, raising questions about soundness in cases where the benefit of the sale combined with other measures doesn't solve for their issues.
Further complicating counterparty assessments and MSR valuations is the fact that
"Interest rate volatility is very high," said John Sim, head of securitized product research at JPMorgan Securities, noting that recent forecasts call for a decline in rates to around 6.25%, at the most, next year. Rates have been
Not that long ago, some forecasts were anticipating rates as much as a percentage point lower, showing how quickly assumptions can change, he said.
He was reluctant to state a rate that would be a tipping point for the market, but noted that when 30-year mortgages were closer to 6%, technologically outfitted nonbanks in the market refinanced a finite group of recent borrowers with higher rates very efficiently.
Another development that's making traditional assessments of rate risk in the MSR market difficult is the first-lien lock-in effect.
A large mass of outstanding borrowers holding on to record low rates, who may not face traditional prepayment risks, are increasingly prospects for second-lien products like home equity lines of credit.
"We don't know what interest rates are going to trigger with all this," said Adler.
Given where rates currently stand, mortgage companies are increasingly willing to pay prices based on the customer value of MSRs for such cross-sales of home equity products or other purposes.
Some have paid up for servicing as a result, which can bolster their soundness, but it has also resulted in some bifurcated market pricing. Customer value is not a consideration for passive investors, so their view of pricing has been far different.
"We're not going to make any money on recapture," said Khalil Kanaan, head of residential assets for LibreMax.
Bifurcation in the market also continues to exist because banks avoid Ginnie Mae products, resulting in price disparity in comparison to MSRs associated with the government-sponsored enterprises. The GSE market continues to draw interest from financial institutions broadly.
And while some banking regulators
(Some pundits, including conservative NMN columnist and analyst Chris Whalen, forecast the incoming administration
Assuming the rule continues to move forward, panelists indicated that they foresee the credit as being helpful for some, but not all nonbanks.
"A lot of large nonbanks are not, or not completely, hedging. It gives credits for owners of MSR that hedge. You have to demonstrate a track record. It does not look like someone not hedging can jump in [and get the credit]," Adler said.
