One tenet of real estate investing is that you never should sell a home in a down market. And one tenet of mortgage banking has always been that you don't sell servicing rights in a down market either.

Of course, since the housing bust three years ago, few large bulk "healthy" MSR packages have changed hands, unless the government's been involved. But it appears that a sea change could be in the making regarding which firms service America's home mortgages.

It's no secret that the nation's megabanks have seen their MSR portfolios slide in volume the past year. Among the top five ranked servicers, just one firm, Wells Fargo, managed any growth in the first quarter, and that bank¹s growth was negligible at best 1%.

Indeed, Bank of America and JPMorgan Chase are in no rush to keep MSRs, which raises the obvious question: Where are all these MSRs going to reside?

Deborah Martin-Dominick, vice president of business development for Round Point Mortgage Servicing Corp., Charlotte, N.C., thinks she may have a partial answer: smaller shops (banks and nonbanks alike) are holding onto their MSRs instead of selling them servicing released on a flow basis.

Round Point is a relatively young subservicing shop that focuses on both distressed MSRs, and handling performing servicing chores for others. She said Round Point has one bank client that it services 10,000 loans for.

Although she could not name the shop because of confidentiality clauses, she said the firm has other clients as well‹and Round Point¹s base of customers is growing.

The trend toward smaller shops keeping their MSRs began after the mortgage bust when the price that aggregators (the megabanks again) offered for the servicing-released premium (SRP) began to drop.

Glen Corso, managing director of the Community Mortgage Banking Project, is quick to point out that many of his smaller to midsized members are fed up with SRP prices. "A lot of our members feel they are not getting properly compensated for the SRP," he said. "It just makes more sense to keep the servicing." But if a small to midsized shop wants to keep the servicing strip that means it will have to handle the processing chores as well. And that¹s where subservicers like Cenlar, Dovenmuehle, LoanCare Servicing Center, Round Point and others come in.

If the originator of the loan does want to invest in the startup cost of entering the servicing business, it can subcontract out the processing task to a subservicer, splitting the 25 basis point minimum fee (on a GSE loan for example) with a contractor of their choice.

Servicing advisors and subservicers aren't all that eager to give out the names of their client base for fear of losing a customer to a competitor, but one analyst told me he¹s been working with a mortgage banking firm that has grown its MSR portfolio to just over $1 billion in the time span of just 18 months.

"Listen," he told me, "the meltdown in the mortgage business has been great news for subservicers. With all the regulators piling on about robo-signings and with Basel III rules [putting caps on MSRs and capital] this has been terrific for them."

George Christo, executive vice president of The Prestwick Mortgage Group, Alexandria, Va., has a slightly different take on the trend: "There are firms out there that didn¹t have any of the legacy issues tied to the 2004 to 2008 book of business. It¹s a very easy economic decision to make‹pile on and keep all the new stuff," he said.

Questions Arise Over BofA¹s MSR Package

In a related story, Bank of America still hopes to unload roughly $50 billion worth of "legacy" mortgage servicing rights, but a recent bid deadline came and went with no deal being reached, according to industry advisors familiar with the offering.

"The portfolio didn¹t trade," one servicing analyst told National Mortgage News. The analyst, who requested his name not be used, added that BofA "is still working on it, but they weren¹t happy with any of the bids." The package — which has been described as "high touch" servicing — is expected to be offered again.

BofA has declined to discuss the sale, or its size. As reported on the NMN Web site two weeks ago, the MSR package was initially thought to be in the $40 billion range, but new information suggests it¹s $10 billion higher.

Sources said Freddie Mac, which is controlled by the government, has been pushing for the sale.
As for which investors might bid on the package, speculation has settled on subservicing firms. ³I don¹t think any of the traditional buyers are interested,² said one East Coast advisor. Another advisor suggested subservicing firms may not ultimately win the bid.

"Traditional buyers" is code for the megabanks: Wells Fargo, Bank of America and JPMorgan Chase. All have their own problems these days, dealing with MSRs and Basel III capital rules which cap how much servicing rights can count toward core capital. (BofA, of course, is the seller, hoping to unload seasoned servicing that belonged to Countrywide Financial Corp., which it bought in August 2008.) The BofA package is believed to be the largest servicing offering to hit the secondary market in quite some time. However, later this summer a $40 billion package of Taylor, Bean & Whitaker (TBW) MSRs will be ready for bidding.

The TBW package has been approved for sale by the firm¹s bankruptcy trustee.

Milestone Merchant Partners of Miami and Washington has been selected as the broker on that deal.

A representative from Milestone said he could not comment on the TBW package at this time.

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