Mark Garland, managing director, MSR pricing and analytics at SitusAMC, used a comparison which described holders of those assets as being scared.

"I think the industry is feeling a bit like a deer in headlights," Garland said in a white paper. "How do you manage assets? What's happening with the regulatory environment?"

The company values approximately $8 million in mortgage servicing rights every month and was a part of 43 transactions with $74.8 billion of unpaid principal balance last year.

Making decisions around selling and purchasing MSRs is challenging in any environment, as the market for these assets is opaque and most lenders have "interconnected webs" between their origination and servicing operations.

Mortgage origination volatility ripples through MSR market

In Garland's view, where interest rates and mortgage origination volume end up over the next 12-to-18 months, is the so-called "million-dollar question" affecting servicing.

Both Fannie Mae and the Mortgage Bankers Association increased their volume outlooks for 2025 in their April forecasts compared with March. While MBA put out a higher outlook on rates — with the trade group predicting those averaging 7% for the current period — Fannie Mae now expects them to end the year at 6.2% and 2026 at 6%.

Whatever happens with production will impact servicers.

"Volume is everything," Garland said. "Volume is going to be the issue that will keep people in the business or drive them out."

Normally, origination and servicing profitability move in opposite directions, creating the so-called natural hedge. In fact, 2024 was a rare year where both made money for the independent mortgage bankers who participated in an MBA study.

Servicing bets hinge on duration and luck

Duration is the bet MSR investors make for this asset, Garland said. If an investor is counting on the MSR remaining on its books for three years and it gets five, "it's enormously positive.

"Alternatively, if the investor bets on five years of life and only gets three, the return is enormously negative. You have an asset that could easily lose 20% to 30% of its value."

There's a bifurcation in the market between borrowers who received low interest rate mortgages during the pandemic and the ones who have more recent loans and thus are likely to have a shorter duration.

Among the strategies to mitigate risk is hedging, but the yield curve inversion that started in July 2022 made that both expensive and difficult.

Banks are typically very disciplined around hedging strategies, but Garland feels it will be interesting to see what other MSR owners do if interest rates fall.

"Will they move to hedging, which has gotten tough and pricey, or will they just cross their fingers and hope the pain isn't too much?" he wrote.

Rate swings could unlock dormant recapture potential

Garland noted the industry has gotten more proficient at recapture, an activity some observers feel was the motivation driving the agreement for Rocket Cos. to acquire Mr. Cooper.

In the current rate environment, however, there are recapture opportunities for just between 10% and 20% of mortgages outstanding in the market overall.

But if rates were to fall significantly, the market for recaptures could grow to 60% to 70%.

When it comes to MSR sales during 2025, the report called it "the year of capitulation," where several firms who have weathered the difficulties of the past few years are now deciding to exit. That wearing down of rights holders includes the Rocket/Mr. Cooper deal, it continued.

Furthermore, a scarcity of originations, especially for those who acquire MSRs via the wholesale or correspondent channels, or by purchasing bulk packages, are inflating prices for this asset.

"If you're a retail originator, you're pretty happy because that mortgage is cheaper for you to produce," Garland said.

GSE shakeups and housing costs cloud MSR outlook

But the wild cards impacting the future of the MSR market are the future of Fannie Mae and Freddie Mac, as well as home affordability continuing to decline.

If the Trump Administration follows through on privatizing the government-sponsored enterprises, including no longer having explicit government guarantees for investors, it is likely agency mortgage-backed securities will no longer have "AAA" ratings, reducing investor appetite for these instruments and increasing mortgage costs, and that would trickle over into the MSR side.

Furthermore, a privatized Fannie Mae and Freddie Mac could limit their lending footprints and no longer serve higher-risk borrowers, further tightening mortgage credit availability, SitusAMC said.

"The market is opaque, and mortgage banking is deeply interconnected," Garland reiterated in the final section of the white paper. "Every decision impacts the broader platform."