In January all the mortgage industry was aflutter with talk that Fannie Mae and Freddie Mac —under the tutelage of their regulator — were weighing a change to minimum servicing fees.
Almost seven months later no change has come and most servicers are working under the proposition that the whole idea is pretty much forgotten. Except that it’s not.
Originally, servicers and analysts who ply their trade in the MSR space expected the Federal Housing Finance Agency (FHFA) to issue a proposal before the July 4 holiday, but the date came and went and nothing had appeared.
An FHFA spokeswoman recently clarified that the agency “continues to work on this and we expect to have something at an appropriate time later this year.” No other details were provided.
The latest thinking is that the agency will float several different proposals, request public comment and then draft a final regulation. But what exactly will the proposals entail and how will it alter the current 25 basis point minimum?
Tim Rood, managing director of The Collingwood Group, expects the agency to issue a proposal in the form of a new white paper. Rood anticipates that there will be just two options offered: “fee for service and a reduced servicing fee model (maybe one-eighth but not much less),” he told ASR sister publication National Mortgage News. (A minimum servicing fee of one-eighth translates into 12.5 basis points, exactly half of the current fee.)
Another analyst, requesting his name not be used, said the minimum might be in the range of 12 to 18 basis points. He expects to see a formal proposal by the beginning of September.
In the meantime, the nation’s megabanks — Wells Fargo, Bank of America, JPMorgan Chase and Citigroup — are showing no propensity to add MSRs to their balance sheet. In fact, most are writing down the asset value of their MSRs in anticipation of coming Basel III rules that cap how much servicing rights can count toward core capital.
BofA recently confirmed that it will be a net seller of MSRs, telling analysts as much during an earnings conference call. The bank is already out in the market with a $40 billion package of MSRs tied to Freddie Mac loans.
Of course, auctioning off MSRs in today’s market is like selling a home in a down market. Just who might buy the receivables? In years past all the likely buyers of large servicing packages were the very same firms sitting atop the MSR rankings: Wells, B of A and JPM.
Then again, a contrarian might argue that now is exactly the right time to buy MSRs because the price is so cheap.
Austin Tilghman, CEO of United Capital Markets, an advisory firm that specializes in hedging MSRs, is starting to see a trend of smaller shops entering the servicing business. “The change is happening now,” he said. “We have more prospects today than we’ve had before. These smaller shops want to own servicing.”
When asked what type of firms he replied: “Community banks, small mortgage bankers and regionals. We told Fannie Mae all about it,” he added. “They’re very excited.”
Why should Fannie be excited? It’s simple: during the boom years the megalenders/servicers could force price concessions in the form of lower guaranty fees from the GSE. Now with the industry possibly headed toward deconsolidation, that bargaining power could disappear.