The MSR Market Is Hot … Yet Continues To Be Filled with Idiosyncrasies
“Demand is high and values are up, so it’s a good time to sell,” could be one potential summary statement about the current state of the residential mortgage servicing rights (MSR) market. On the other side of the market, many buyers and holders of the MSR asset are saying, “yields are attractive and MSR financing is readily available, so it’s time to buy” or, “I need to keep those customer relationships, so I’m going to retain the servicing instead of releasing it.”
Those perspectives were underlying themes in Managing the Challenges of MSR Liquidity, a session on May 21 at the National Secondary Market Conference of the Mortgage Bankers Association. These themes surfaced continually in a panel discussion about an essential but small market within the residential mortgage industry – a market thriving with activity and filled with idiosyncrasies.
The panel for the session featured three representatives from advisory firms that value and trade MSRs for clients, as well as a representative from a bank that provides MSR financing. Among the panelists was Mark Garland, managing director of analytics at MountainView Financial Solutions, a Situs company.
Bidding activity is at a high point across Fannie Mae, Freddie Mac and Ginnie Mae MSRs. According to the panelists, this is visible in the number of bidders and in the bid levels.
“We recently traded a deal where 30-year conventional fixed-rate product went above a 5.5 multiple, and that would have been unimaginable six months ago,” said Garland, referencing the percentage of unpaid principal balance paid in relation to the average servicing fee that can be collected. “We also traded a Ginnie Mae deal that went above 4x, and that doesn’t sound as big, but it is a huge number.”
In explaining the current pricing levels and market activity, the panel reminded the audience of both active market participants and new market entrants that this is a thinly traded and somewhat opaque market in which a myriad of factors can easily cut values by 20-50%. A simple illustration of this point was a comparison of the To-Be-Announced (TBA) Mortgage-Backed Securities markets, where hundreds of millions of product is traded daily and where pricing is easily found through electronic reporting services, to the MSR market, where just $100 billion of product might trade in a year and where pricing is purely model based and further influenced by the selling counterparty.
Garland more specifically defined the MSR market as having 20-30 potential buyers on bulk deals and about 10 potential buyers for co-issue deals in which the servicing and loan are sold at the same time.
Among the high number bidders in the market is a somewhat even mix of operators and investors. Private equity funds and real estate investment trusts entered the market 6-7 years ago and continue to have a significant presence, while holders of the asset with legacy platforms continue buying to take advantage of their operational efficiencies. An increasing number of banks are also returning to the market, and their focus so far has been on Fannie and Freddie product.
In addition, the increased availability of MSR financing has made it easier to both buy and retain servicing. Warehouse lending facilities of $75-150 million are offered by a few banks, and there is some uncertainty about whether $500 million of financing recently provided by Freddie Mac would become more commonplace.
On the point of retaining servicing, the value of customer relationships seems to approaching historic highs at both banks and non-banks, according to the panelists. More loan officers are communicating a desire to retain the servicing in an effort to recapture clients at refinance opportunities, while bankers wish to maintain multiple financial relationships with their clients.
On the opposite side of this “customer first” approach, some banks are choosing to prune their servicing portfolios of customers who have only mortgages.
Other banks, according to Garland, have been selling servicing with deep-discount coupons – product with limited refinance incentive and that does not appreciate in value as rates go up. “Frankly, the horse has run, and now it’s much harder to hedge that servicing,” he explained. “Some banks have said, ‘Look, I want to keep what’s closer to par and sell deep discount, which so happens to be getting the best prices we’ve seen in the marketplace.’”
In closing remarks, the panelists commented on the importance of having complete data if you want to attract the highest number of bidders and the highest bid levels. FICO scores and loan-to-value ratios are among the critical data, and banks will require this data at a minimum for stress testing.
This Real Estate Inventory Shift Could Resuscitate Mortgage Lending
There is blood in the streets. If you are in the mortgage business, you know what I mean. Across the country, mortgage lenders have slammed into a wall at 100 MPH without a seatbelt. The car was full. Reporters are just arriving on the scene to discover bodies scattered everywhere.
What’s worse, their vehicles — the mortgage businesses they have created — are a total wreck. It turns out they were driving 1963 VW Beetles in a world embracing Tesla-inspired hybrids and ran out of parts as their rickety Bugs began to fall apart.
Welcome to the spring of 2018: the mortgage industry’s worst nightmare. Except this is not a dream, and tens of thousands of people are losing, or are about to lose, their real jobs. Why? Four factors converged:
1. Mortgages rates jumped.
2. Record low inventory.
3. Everybody’s stuck.
4. No money in mortgage origination.
Read more: Forbes
Who Needs a Down Payment? Trade In Your Old Home Instead
Soon it may be nearly as easy to trade in an old home for a new one as it is to dispense with a used car.
Open Door Labs Inc., a San Francisco startup that buys homes in cash and turns around and flips them, is getting into business with home builders. The partnerships will offer new-home buyers a “trade-in” feature that will allow them to buy a new home without having to worry about the hassle of selling the old one.
If the idea catches on, it could pose a threat to the residential brokerage industry. Traditional real-estate agents wouldn’t be needed in the kind of deals being contemplated.
Opendoor has been piloting the program in select markets, starting with Las Vegas in 2017 with Lennar Corp., the country’s largest home builder by revenue, which is an investor in Opendoor. Opendoor said it facilitated the purchase of $40 million of homes last month through its partnerships with Lennar and other home builders, including Meritage Homes Corp.
Now, Opendoor is rolling out a larger program in which any customer buying a new home will have this option in any of the nine markets where Opendoor operates.
Read more: Wall Street Journal
Ginnie Mae Preparing to Make Digital Mortgage Leap
The Ginnie Mae 2020 report coming out this summer will reveal the path the agency is taking toward working with digital mortgages, an agency executive said at an industry conference.
The mortgage industry has been looking for Ginnie Mae to speak about its plans for digital mortgages, said Michael Drayne, senior vice president, issuer and portfolio management at the Mortgage Bankers Association National Secondary Market Conference in New York.
Ginnie Mae 2020 will “talk about the principals important to us in this and the path forward,” Drayne said.
Read more: National Mortgage News
Southern California’s Median Home Price Hits a Record $520,000 Despite Rising Mortgage Rates
Southern California home prices in April surged 7.2% from a year earlier to reach an all-time high, a sharp increase at a time when rising mortgage rates are making an already pricey housing market even more so.
The region’s median sale price for new and resale houses and condos was $520,000, up $1,000 from the previous high set in March, according to a report released last week by real estate data firm CoreLogic.
“It’s extremely hot,” Derek Oie, an Inland Empire real estate agent, said of the market. “When is it going to end?”
Agents say buyers are increasingly asking that question. Many economists predict that price appreciation may slow as people find it harder to afford a home, but they don’t see values falling unless the economy takes a turn for the worse.
Read more: LA Times
Single-Family Built-for-Rent Construction
The number of single-family homes built-for-rent increased over the last four quarters. During this time period, construction starts of this type of housing totaled 37,000 homes, compared to 33,000 for the prior four quarters. There were 7,000 single-family built-for-rent starts for the first quarter of 2018.
According to data from the Census Bureau’s Quarterly Starts and Completions by Purpose and Design and NAHB analysis, the market share of single-family homes built-for-rent, as measured on a one-year moving average, stood at 4.3% of single-family starts as of the first quarter of 2018.
Given the small size of the market segment, the quarter-to-quarter movements are not typically statistically significant. The current market share remains higher than the recent historical average of 2.7% (1992-2012) but is down from the 5.8% reading registered at the start of 2013. This class of single-family construction excludes homes that are sold to another party for rental purposes. It only includes homes built and held for rental purposes.
Read more: Eye On Housing
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