It's no secret that nontraditional players have been gobbling up mortgage servicing rights on the cheap, shifting the power structure in a business that has rapidly seen its fortunes wane during the nation's housing depression.

Firms both new and old with names like American Home Mortgage Servicing Inc. (AHSHI), Green Tree Servicing, Nationstar, Ocwen Financial, and Seterus combined have bought upwards of $300 billion of MSRs the past four years, hoping to find gold in the high touch servicing sector. (Some of these deals are subservicing arrangements where they share in the servicing strip.)

But all of these firms – with the exception perhaps of Nationstar and until recently AHMSI – have one thing in common: none are actual lenders and instead are dependent on a steady flow of servicers running for the hills, tossing their problem MSRs overboard at whatever price they can get.

Over the next two years all of these firms can probably count on megabanks such as Bank of America, JPMorgan Chase, Ally Financial and others to sell their problem receivables – both prime and nonprime alike. But what happens when the selling stops?

Mortgage banking has always been a counter-cyclical business: when originations wane, lenders live off their servicing contracts. Of course, not every lender is a servicer – but there's been a growing army of ‘servicing only' shops.

Is it possible that Green Tree, Ocwen, and Seterus (the latter of which is owned by IBM) will eventually enter the origination business? 

For now, the answer to that question is probably no, but until a few quarters ago AHMSI's model was built on being a specialty servicer. In late 2010 it hired former GMAC Mortgage executive David Applegate and all that changed. Prior to that, it was primarily known for being Wilbur Ross' specialty servicing shop.

In a recent interview with National Mortgage News, Applegate noted, “We plan on becoming a much more meaningful force in lending.” It also launched a correspondent lending division and is forecasting $6 billion of production by the fall – servicing rights that will remain at AHMSI. (The firm is in the process of changing its name to Homeward Residential.)

AHMSI/Homeward also plans to launch a direct-to-consumer call center operation by midyear.

Nationstar, meanwhile, has been growing its production at a healthy clip. The firm, which was partially spun-off by parent firm Fortress Investments, funded $3.4 billion in 2011, up from $2.8 billion the year before. Those servicing rights too will be kept in-house.

Servicing brokers and advisors aren't surprised at the strategy. Firms such as Mortgage Industry Advisory Corp. have been telling their clients for well over a year that MSRs are extremely undervalued.

But something else may drive non-originating servicers into the funding business. Servicing analysts note that MSRs that are home grown – as opposed to being bought in the secondary market – carry a huge tax advantage.

“If you buy MSRs you have to amortize them on a straight line basis,” one analyst told me. “But originated servicing rights are carried at a zero basis.” 

In other words: in time the value pendulum will swing and Green Tree, Ocwen, and Seterus and others might decide that maybe originating loans – despite the regulatory hassles – isn't such a bad idea after all.

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