Fortress Investment Group must feel like a kid in a candy store — a kid with a ton of money to spend and possibly more on the way. Its goal: to put at least $500 million of investor money to use, purchasing mortgage servicing rights in the secondary market.
One source I know who plays in this market suggested that in time the publicly traded Fortress might even have $650 million to spend. Do I hear $1 billion? But I’m getting ahead of myself.
In case you’ve been living in the wilderness, the value of MSRs has plummeted compared to the halcyon days of 2007 — before the subprime meltdown and the crash of U.S. home values. Throw in tighter regulations on how much MSRs can count toward core capital for banks and you get the impression that only a crazy person (or institution) would want to hold mortgage receivables.
But any mortgage professional worth his/her salt knows that MSRs can be extremely valuable because they throw off cash flow—and just because some banking regulator wants to play accounting god, that doesn’t mean there isn’t gold in the hills. Money is money.
Servicing advisory firms as the likes of Interactive Mortgage Advisors, Mortgage Industry Advisory Corp., The Prestwick Mortgage Group, and United Capital Markets have been telling their clients for two years now that MSRs may not sell for much in the secondary market — but they’re worth much more. Only a fool would miss this opportunity.
Private equity money has been sniffing around MSRs for about two years as well, but with not much to show for it. And now it appears the publicly traded Fortress — a money management firm — has beaten them to the punch. But what (and when) will Fortress buy?
The company — headed, until earlier this year, by former Fannie Mae CEO Daniel Mudd — isn’t sharing its corporate strategy with me, but many M&A advisors I talked to say it’s likely that Fortress is queuing up up for its Nationstar Mortgage affiliate to buy large chunks of Residential Capital Corp.’s MSRs.
“Fortress is fattening up for ResCap,” one analyst said, requesting his name not be published, “but there’s other opportunities out there as well.”
This analyst suggested that eventually MetLife will unload the $80 billion in MSRs on its books — and that maybe even the mortgage division of PHH Corp. might be up for grabs. And there’s also Bank of America to consider. BofA has been shedding large chunks of MSRs for almost a year now — with no end in sight.
Of course, if Fortress/Nationstar wants ResCap, it will have to compete against Ocwen Financial and whatever mortgage investment vehicle that Warren Buffett’s Berkshire Hathaway is putting together.
But there’s something else to consider: time. It’s been suggested in some circles the MSR “fire sale” of the young century won’t last forever and that maybe, just maybe, too many investors will flood the market causing those bargain basement servicing prices to evaporate.
Redwood Trust, Mill Valley, Calif., a publicly traded REIT, recently signaled its intention to invest in MSRs and at least one other REIT, New Castle, is already in the space indirectly.
“When [PE] funds raise money it’s for specific opportunities,” said one West Coast-based mortgage manager. “Opportunities can open up — and then they can close. Fortress might be in this space for two, three years, maybe more. But they won’t be in it forever.”
This manager suggested that now is the time to be buying, noting that precrisis, MSRs were selling at four- and five-times the servicing fee. Today, the bid is two-times.
“The pricing has turned into a big advantage for nonbanks that want to buy or add servicing,” he said. But he was adamant: these deals won’t last forever, which means Fortress may want to spend its $500 million soon, instead of waiting too long.