With Bank of America shedding mortgage servicing rights en masse, and a handful of other megabanks writing down their MSRs because of Basel III, prepayments and other concerns, one might think that the asset must stink to high heaven. Well, think again.
Quietly, dozens of small- to medium-sized mortgage firms have been contemplating the unthinkable: keeping the new MSRs they create instead of selling their loans servicing-released.
“I have 20 clients who are thinking about holding MSRs,” said Austin Tilghman, president and CEO of United Capital Markets, Denver. “It's an economical thing.”
It's no secret among correspondent sellers—firms that originate in their own name and then sell servicing-released—that the big boys on the other end of the transaction haven't exactly been paying up on the SRP (servicing-released premium).
“The chief reason is the SRP,” said Glenn Corso, managing director of the Community Mortgage Banking Project. “Our members feel what's being offered is below the real economic value of the servicing they're creating.”
According to servicing brokers, the SRP currently being paid by the megabanks translates into a value of two to three times the servicing fee, at best. “But the real value of that servicing strip is four times to five times,” said one advisor, requesting his name not be attributed to the estimate because he has clients on both sides of deals.
Calculated in terms of basis points, the SRP can range from 50 basis points to 110 bps, said Corso. (The standard minimum servicing fee on Fannie Mae and Freddie Mac loans is 25 basis points, though their regulator is contemplating changing it.)
Of course, the problem with lenders servicing loans on a monthly basis is the start-up costs. Installing new servicing software can be expensive in terms of hardware, software and training.
Corso, Tilghman and others believe that's where subservicing firms come into the picture —companies such as Cenlar, Celink and Loan Care Servicing Center. Subservicers split the servicing fee with the originator (or investor) that owns the strip.
There has been a general perception in the industry that MSRs created over the past year or two are “golden” in quality and carry little default or prepayment risk because of a renewed focus on underwriting quality, stemming from buyback fears. That said, plenty of companies took charges in the third and fourth quarters on their MSRs because of prepayments. Just because a mortgage was funded at 4.5% that doesn't mean a borrower — with equity — won't refinance into a 3.5% loan, especially if the loan balance is north of $200,000.
Managing MSRs can be a tricky business. Firms such as PHH Mortgage can mark up the asset value of servicing rights, only to take a big writedown the next quarter when prepayment speeds accelerate.
But as any servicing advisor can attest: what can be written down in value can also be written up.
As for how many mortgage banking firms and community banks will wind up owning the servicing strip or actually processing MSRs, that's a different question. UCM, Tilghman's company, hedges the asset for his clients, so he would obviously love to see more players in the market.
Matt Maurer, a servicing executive at MountainView Capital, Denver, said of late he's had “dozens of conversations” with firms that have expressed an interest in holding MSRs.
Corso said “more” of his members are looking into holding MSRs, but declined to given an exact figure. And all three, for competitive purposes, would not name names.