TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/1345021
28 | M R EP O RT FEATURE I f difficulty breeds opportunity, there may be untold treasures awaiting mortgage servicers, who are facing challenges unlike any seen since the 2008 housing market collapse. Of course, today's challenges were caused by a global health crisis, not by any underlying systemic issues. But regardless of the cause, today's crisis has created enormous volatil- ity across every segment of the industry, especially the mortgage servicing rights (MSR) market. It's difficult to overstate just how paralyzing an impact the COVID-19 pandemic had on MSR values. Almost all trading activity came to a sudden halt in March 2020. Servicers that could afford to hold onto their MSR assets did so, while those that were experiencing liquidity issues and had no other choice but to offload MSRs did so, but only at bargain-bin prices. Even then, there weren't many takers. Today, a different picture is emerging. MSR values have recovered considerably, and large trades and brokered offerings are increasing. Optimism is returning to the market. To be sure, plenty of challenges and unknowns loom ahead. But so do prospects for growth, especially for those with the right approach. Understanding What Happened P rior to 2020, the MSR market had experienced several years of growth and activity. Buoyed by a strong economy and job growth, many different investors were active in trading these assets because of their high returns, especially independent mortgage bankers. Yet for some time before the pandemic, low mortgage rates had already begun to depress MSR values. It was only when the pandemic hit that values went into freefall. The pandemic continues to be the biggest element influencing the MSR market. While low rates and high origination volumes have generally been welcome news, the Federal Reserve's strategy of keep- ing mortgage rates low by buying bonds has led to record refinance volume as well as an increase in prepayments. According to data released by Black Knight in January, industry prepayment activity in December was up 11.7% from the prior month and 112% higher than the same time one year earlier. These trends have prevented MSR values from a full recovery. Both bulk and co-issue MSR market activity are still significantly below pre-pandemic levels for conventional loans and even further below for FHA, VA, and USDA loans. Several factors have helped stabilize the MSR market in recent months. For most lenders that hold MSRs, the increase in origination volume has provided some cushion against lower values. Meanwhile, lenders looking for new avenues of business are looking for portfolios that have recapture opportunities. Another hopeful sign is the likelihood that interest rates will begin to slowly rise at some point in 2021, which will reduce prepayments and boost MSR values. There's also hope that MSR valuations and liquidity will continue to rise as the pandemic lifts and borrowers who were in forbearance plans begin to recover. Recently several large MSR deals have generated optimism. Ocwen Financial, for example, is investing in about $250 mil- lion in Fannie Mae and Freddie Mac MSRs with Oaktree Capital Management. In mid-January, Ocwen and Freedom Mortgage successfully bid on a $25 bil- lion Quicken Loans portfolio. Meanwhile, the National Credit Union Administration is propos- ing to allow credit unions to buy MSRs from each other—although at the time of this writing, the proposal's fate is unknown. In early January, MountainView an- nounced it is brokering $3.5 billion in MSRs for Fannie and Freddie loans, most of which were origi- nated between 2015 and 2016. Independent mortgage bankers are leading the way. By the end of December, independent mortgage bankers comprised a majority of the market—56%—for owned single-family agency mortgage- backed securities, according to an analysis by Inside Mortgage Finance. All totaled, independent bankers were servicing more than $4 trillion of agency loans at the end of 2020, which was up 8.1% over a three-month period. Where the Market Is Headed M SR values are set based on the expected future Finding Opportunities Amid an Improving MSR Market If difficulty breeds opportunity, there may be untold treasures awaiting mortgage servicers, who are facing challenges unlike any seen since the 2008 housing market collapse. By Brandon McGee