Multiple public companies wrote down
Determining whether the servicing market overall has gotten hotter or cooler as a result of this change depends, to an extent, on how low the rates on the loans involved are.
"Towards the end of the year, we saw rates moving down, and MSRs needed to be written down and there are different approaches to that, depending on each situation," said Tom Piercy, president of national business enterprise development at Incenter.
But with prevailing mortgage rates still higher than many older loans outstanding, investors don't have much worry that those borrowers will prepay. MSRs from more recent loans were the ones that generally had valuations written down.
"For the mortgages with the higher interest rates, obviously the investors are going to be concerned that those loans will be refinanced and the MSR will disappear or refinance," said Mike Nedzbala, a partner at law firm Hunton Andrews Kurth.
By contrast, the pricing on bulk packages of MSRs for older loans is being driven by something else.
"Where valuations do fluctuate on that portion of the MSR asset is all tied to escrow balances," Piercy said, referring to money lenders often hold for distribution to what are generally increasing housing-related obligations like property taxes and insurance on borrowers' behalf.
Escrow-based valuations in this market have generally been strong. But borrowers with Federal Housing Administration-insured loans, for which escrows are common and the borrowers tend to be first-time buyers with lower incomes, may be under pressure.
"The value of the escrows has improved tremendously over the last two years, because of where short-term rates have moved, but with that comes some potential risks around the
Overall, though, MSR valuations are still looking pretty good this year, in part due to an uptick in buying interest that tends to occur in the first quarter, according to Piercy.
"We're seeing an extremely robust, strong market, which is also very typical and cyclical. The first quarter of any year typically starts out hot, because we've got new budgets in place from a buy side, and people want to deploy that capital," he said.
There's also a lot of selling interest in selling MSRs on the part of lenders who have
"People are trying to get as much liquidity as they can for their balance sheet as this market continues to struggle. So a lot of servicing is being transferred," he said.
Some buyers are valuing servicing more highly than others due to advances in their recapture capabilities, designed to ensure that if borrowers refinance, they still remain in the existing portfolio.
"Those servicers who are successful in recapture, or have a partner who is, are looking at this differently," Piercy said.
As the low rates of the pandemic years fade, more of the market will have higher rates.
Though servicing buyers use a variety of metrics to evaluate portfolios, Nedzbala said they have been increasingly focused on retention numbers, which overall are typically low.
"I'm definitely seeing in connection with the purchase and sale of MSRs where the purchaser has a recapture partner that it works with or they're working something out with the seller," he said.
When asked about the degree to which non-solicitation agreements are adhered to currently, Nedzbala said it's generally something a mortgage company wouldn't want to risk if they're interested in continuing to sell MSRs.
"I think as the market has matured, sellers realize that they're not going to be able to sell MSRs if they're going to have a reputation," Nedzbala said.
Both flow and bulk deals have been in the market, but sales of servicing rights from newly originated loans in government-related markets are growing at a faster rate, he said.
"It used to be that people just would wait to aggregate loans and do them on a bulk deal. But now these originators want their capital as soon as possible, so there is incentive for them to participate in these programs," Nedzbala said.
Piercy said in a recent interview that prices for flow deals have been historically strong but lower than at the market's recent peak while bulk deals still sometimes price at relatively high levels.
Anecdotally, higher prices tend to be paid for stronger counterparties and representations and warranties, Nedzbala said. Whether servicing is easily deliverable to the buyer's system could make a small difference in price.
Depositories are still buying but mindful of regulatory constraints, with more of the smaller banks selling for various reasons. Meanwhile, the number of nonbank buyers has been growing.
Generally, the market and rates seem to be at a place where both MSR buyers, sellers, lenders and servicers all see potential upsides and generally have been able to agree on prices.
"It's a better interest rate environment," Nedzbala said.
