It might be said that over the past three years a mortgage banker couldn't give away "legacy" mortgage servicing rights. (Just ask the megabanks, especially Bank of America.) As for the new stuff, buyers were plentiful — but only at their price.

But now there's a growing belief that MSR values — especially for new production — have bottomed out, and that it's all blue skies ahead. Of course, there's a new cloud looming for both investors and holders: yet another wave of declining rates which could spur even more portfolio run-off.

Still, let's assume that the recent downdraft in rates won't get any worse and then ask this very basic question: will those buying MSRs at today's rock bottom prices look like geniuses when the smoke finally clears?

Indeed, firms the likes of Nationstar, Ocwen Financial, and Walter Investment Management Corp. are banking on just that. All these nonbanks (all publicly traded) have been opportunistic buyers of MSRs, purchasing legacy (including nonperforming) receivables on the cheap.

Their general thinking has boiled down to this: MSRs are just way too cheap even when you factor in worst-case delinquency scenarios.

With these firms emerging as the sole buyers of distressed (and performing) servicing there's a general perception that the megabanks are moving out of the MSR market -- but that very well could turn out to be false assumption.

"Broadly speaking, the shorter term advantage goes to nonbanks [on MSRs] because they have the access to capital and platforms right now," said Jeff Levine, managing director of Milestone Merchant Partners, Miami.

Levine, whose firm represents both buyers and seller of mortgage-related assets believes that over the long haul banks will stick with the residential receivables market. "Banks are still the logical owners of the asset, and will be again in some fashion or another," he added.

It's no secret that coming Basel III rules cap how much MSRs can count toward core capital. Yet, advisors like to point out how Basel III is still unsettled and that any cap could face a long-term phase-in period, allowing bank investors to find a way around the caps or lobby Congress for a loop hole.

Levine is a firm believer that over the next two to three years nonbanks and possibly hedge funds will be the opportunistic buyers but cautiously adds: "Once the delinquencies and default issues are no longer a problem, and banks have re-capitalized and are looking for fee income, a realignment will occur and banks will be the ones who re-emerge — they're better at hedging the IO risk and will have the lowest cost of capital."

But we're not there yet. And servicing advisors continue to talk about low valuations.

If a floor has been reached on values it's likely to be a floor that might last for some time which means deals will continue to be plentiful. And that's where the hedge funds come into play.

To date, no hedge fund has emerged as a major buyer of MSRs, although there's plenty of talk. Servicing analysts I spoke with declined to identify any hedge funds by name but all insist they've had those conversations with them. But one advisor, requesting his name not be published, added that at this point in time the hedge funds have been "all talk and no action."

Hedge funds only invest when they can earn a return of 20%. If they keep waiting those returns may evaporate. So, what are they waiting for?

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