Typically, when the bond markets are experiencing an inverted yield curve, it also sees low volatility, but the mortgage servicing environment is facing an environment that is more difficult and different than many professionals have ever seen, professionals said during a panel discussion at the Mortgage Bankers Association.
The markets haven't seen an environment like this, where companies can have an orphan block of servicing assets, that is yielding 300 or 400 basis points below the current market rates, Austin Tilghman, president and CEO of United Capital Markets said. Tilghman spoke at a panel titled, "Evaluating Investments in Mortgage Servicing Rights," moderated by Gagan Sharma, founder & CEO of BSI Financial Services at the Mortgage Bankers Association's Secondary & Capital Markets Conference 2024.
"We've never seen it in an environment with an inverted yield curve, and lots of volatility," referring to the examples of yields on the so-called orphan block.
New origination servicing is also posing a challenge to loan aggregators and co-issue bidders to rationalize holding servicing assets, according to Jeff DerGurahian, chief investment officer and head economist of loanDepot.com. Professionals also must grapple with the issue of wanting liquidity on assets in an era of low production.
"You will not get near your fair value unless you can get to that critical mass, which tends to be $2 billion or more," DerGurahian said.
Holding onto servicing might seem like an inevitable outcome for some operators, but panelists expressed skepticism about that, too. If a mortgage servicer is still holding onto a 2020 or 2021 bid, for instance, that uber low rate of 3% servicing, it is actually deteriorating in value at 5% just due to payments, according to Seth D. Sprague, director of consulting services at Richey May.
"You've already lost 20% of [portfolio] value just due to payments," Sprague said. "As the 2020, 2021 revenue stream goes away, then the portfolio will decay at an accelerating rate."
Another element of newer mortgage portfolios, particularly in comparison to more seasoned pools, is that they have a much different delinquency profile that they did about 18 months ago, Sprague said. Also, they have higher principal and interest payments, he said.
As servicers navigate these headwinds by turning to hedging assets, they should prepare to answer a few key questions, including what percentage of assets they want to hedge, and do so honestly, according to Tilghman. He added that his customers often understate just what percentage of assets they want to hedge against.
Just one element of portfolios remains the same, Tilghman said. Low coupon assets have almost no prepayment risk.
