The increased frequency of large servicing portfolio trades drove extraordinarily high volumes in January, with some priced at high multiples not seen in over a decade, according to servicing brokerage reports.
Mortgage servicing rights prices in a group of trades at Incenter, for example, rose throughout the month with two large multibillion-dollar portfolios coming in at multiples over five. That means buyers paid more than five times the purchase price expressed as a percentage of the loans’ unpaid principal balance, divided by the servicing fee.
“We have not seen a net multiple of 5x since pre-financial crisis,” said Tom Piercy, president of national enterprise business development at the company, referring to the period prior to the Great Recession.
The high servicing prices and secondary market volume mark the end of a period in which many lenders stockpiled MSRs that they now are ready to sell.
“The indication in the market is that large aggregators, given the increase in rates and the margin compression in the correspondent channel, are executing large MSR sales of $10 billion-plus, and, for the right package, they are seeing up to five-multiple on those sales,” said Mario Gomez, executive vice president and director of capital markets at LenderWorks.
These assets are now appreciating in value due to a marked reduction in their rate-related prepayment risk.
“I think the buyers of MSRs are definitely in a position where they feel much more comfortable with the forecasts on interest rates,” said Piercy, who also is managing director of his company’s capital markets trading and valuation subsidiary, Incenter Mortgage Advisors. “If you tie that to the record origination volume over the last two years, one might say this has been kind of like our Super Bowl.”
Prepayments have returned to pre-pandemic lows and rate-related incentive to refinance has fallen notably, analysts at Keefe, Bruyette & Woods.
“With mortgage rates just above 3.5%, we estimate that roughly 16% of mortgages have a rate incentive to refinance down from 25% last month,” KBW researchers Bose George, Thomas McJoynt Griffith and Michael Smyth said in a report.
“MSRs are becoming much more attractive, especially through the lens of a long-term return on investment,” said Scott Stoddard, senior vice president of business development, default and capital markets at Flueid, in an email. “According to MBA’s annual forecast, refinance originations are expected to slow by 62% from its 2021 size of $2.26 trillion, meaning that MSR assets will have a much greater cash flow expectancy.”
In addition, delinquencies have normalized by some measures after a period of elevation, which is also favorable for the market for MSRs. New CoreLogic numbers, for example, show the delinquency rate officially returned to pre-pandemic levels in November, when it was 3.6%.
The current market conditions have drawn both traditional investors like banks to the market, but also a substantial amount of non-depository interest, Piercy noted.
“We've got the private equity groups that have come in, whether it's through equity ownership of a mortgage company, ownership of agency approvals to be direct investors or through joint ventures, where they're participating with an existing servicer, and they're doing a participation on an interest-only strip,” he said. “The amount of capital that is coming in from the nonbank side is significant.”
Buyer demand, coupled with the release of pent-up supply, drove trades in January to around $180 billion, a level roughly triple what was seen on average last year, according to Mike Carnes, managing director in the Mortgage Industry Advisory Corp.’s capital markets group.
“It’s been a very hot market for MSRs,” said Carnes. “There is a lot of new money in the market right now they’re looking at the upside potential in a rising rate environment.”
However, he cautioned that while forecasts like KBW’s do generally call for prepayments to decline throughout the year, interest rates are subject to change, and refi incentive exists beyond financing costs that could increase speeds.
And while some MSR portfolios are trading at high prices above multiples of five, the average has been closer to 3.5, noted Les Parker, a managing director at consultancy Transformational Mortgage Solutions who does advisory work on servicing valuations.
“I don’t see a problem with a five multiple, but I’m not overly excited by it because I think we could see lower rates some time this year,” Parker said.
