Servicing co-investment vehicle’s launch points to trend

The closing of a $30 million co-investment vehicle for mortgage servicing rights announced Thursday highlights adds to signs of expansion in such partnerships.

Details were scant in the announcement from investment bank Cambridge Wilkinson, which involves a client with licensing approvals to service government-sponsored enterprise-backed mortgages. 

However, taken in conjunction with reports, like Rice Park Capital Management’s $300 million commitment to a new MSR fund and the $65.1 million Prophet Capital raised from investors for a recently-formed investment vehicle, it confirms the number of partnerships is growing.

“We’ve seen significant capital commitments to own MSRs by non-originators recently. The investor community is looking for alternative yield, and the MSR asset is absolutely providing that,” said Tom Piercy, president, national enterprise business development at Incenter and managing director of his company’s capital markets trading and valuation subsidiary.

Piercy declined to comment on any specific examples, but said deals are generally in the $250 million range. Investment for the vehicle Cambridge Wilkinson’s client is involved in could potentially scale up to $200 million or more.

Servicer-investor partnerships have been active in the market for years, and players like Ocwen, New Residential and Bayview were involved in them even before the rate outlook shifted, but they’ve seen a resurgence in growth since the MSR market has heated up.

“Certainly, the trend has accelerated,” Piercy said.

The trend is a subset of a broader exploration of strategic options involving MSRs, said Pat McEnerney, CEO of RoundPoint Mortgage Servicing Corp.

“There has been an increased interest in owning MSRs and in alternative approaches to having a stake in mortgage servicing rights,” McEnerney said. “We have seen proposals for numerous strategies which allow nonbanks to make investments, directly and indirectly, in excess servicing rights and MSRs.”

However, MSR investments have risks that could limit the extent to which these types of partnerships expand.

“The ownership of MSRs is dependent on complying with operational requirements set forth by the GSEs,” said McEnerney. “Failing to comply with GSE requirements could have a significant adverse impact on MSR owners.”

 The interest rate environment also is a risk as well as an opportunity when it comes to these partnerships.

 “As soon as you start making bets on those rates, they'll go the other way. So hedging of these MSR assets is important in making those investments,” Piercy said. “But the reality is interest is growing because of the rate outlook. Expectations around refinancing saturation and rate trends really are putting an emphasis on the greater value of the MSR asset.”

Cambridge Wilkinson’s client is providing both interest-rate hedge and direct investment opportunities, according to the company’s press release.