The Mortgage Servicing Rights (MSR) market continued to defy gravity and remained bullish through the end of June.
On the last day of the month, the New York-based company Mortgage industry consulting firm. (or MIAC Analytics) has released tender documents for an MSR deal it is negotiating that is worth more than $5 billion.
“MIAC Analytics, as the Exclusive Seller Representative, is pleased to offer $5.22 billion for your review and consideration Fannie Mae, Freddie Mac and ginnie mae portfolio of mortgage services,” the offering documents state. “The portfolio is offered by a mortgage company that originates loans with a focus in California.”
In fact, by value, the bulk of the MSR program loans came from California, representing $2.9 billion, or about two-thirds of the total value of the MSR bundle. The percentage of loans secured by Fannie and Freddie in the package is evenly split by value – at 39.3% and 39.5%, respectively. Loans guaranteed by Ginnie represent 21.2% of the package by value.
The offering includes a total of 17,088 mortgages at an average interest rate of 3.127%, well below current 30-year fixed rates, which are now approaching 6%. The reduction in the service charge – a slice of the total interest rate – averages 0.268%.
In addition to the current offering, MIAC earlier this month launched two large MSR offerings involving a pool of $4.8 billion loans and a separate set of $816.7 million, both consisting of loans Fannie Mae and Freddie Mac.
But how long can this MSR boom continue?
Denver GM Tom Piercy Incenter Mortgage Advisors, said that when interest rates rise, the value of MSRs generally increases because the risk of prepayment of mortgages decreases. And the rapid rise in rates in 2022 killed the refi boom, which is a major driver of mortgage prepayments.
Piercy added, however, that at some point rates reach a level where each additional incremental increase does not materially decrease prepayment speeds.
“The issue of diminishing returns is valid,” he said. “However, one should be aware of the nuances and economic variables that impact MSR valuations.”
Yes, we would see prices start to top by just looking at prepayment curves, Piercy explained.
“For example, most conventional 2020 and 2021 models [mortgage] the vintages have seen life [prepayment] speeds drop to 6% or 7%, and more generally to 8%,” he said. “The standard life of a mortgage asset with no refinancing pressure is typically 8% on historical data – simply due to moving, divorce, death, etc.”
A conditional prepayment rate, or CPR, is usually expressed as an annual percentage based on the likely prepayment rate for a pool of mortgages.
“Given this history, you’d think we’re hitting our ceiling with MSR values, but that’s not the whole story,” Piercy said.
Piercy explained that another factor affecting the value of MSRs that could further fuel the rise in value is the relationship between loan escrow balances and short-term rates.
There is a short-term (monthly) float of approximately 13 days between the average one-time payment of principal and interest and the day of remittance to the investor. Long-term escrows, he added, are considered taxes and insurance payments “that are received monthly but not paid to the counties or the insurer for six to 12 months, depending on how often taxes are paid in the county or where owners policy is due.”
“Escrow balances play an important role in valuation when rates are higher,” Piercy added.
MIAC explains the role an escrow balance plays in loan income on its website with the following example:
“The following is a simplified monthly income statement for a $200,000 loan the month after it was sold. Service fee is 25 basis points, incidental income is $20.00 per year, monthly value of escrow fund is estimated at $1.33 (average escrow balance $1,600 at 1 % interest) and the service charge is $125 per loan.
When the spread between short- and long-term rates narrows, as it has since the start of the year, it helps bolster the value of escrow balances and associated MSRs, Piercy said. As of March 1, the spread between 2-year and 10-year Treasury bills was 41 basis points, according to Federal Reserve The data. On June 20, it stood at 4 basis points.
“This increase in short-term rates will impact the value of escrow balances associated with the MSR asset, thereby generating even greater value in the short term,” Piercy said. “As rates rise, however, we will generally see the required return on the investment increase, but that is a lagging parameter, meaning we will see the value of MSRs increase in the short term if those short term rates continue to increase.”
Based on recent MSR offerings in June that add up to recent offerings from MIAC, it looks like there’s still plenty of fuel left in the MSR value tank.
Earlier this week, HousingWire reported that the Prestwick Mortgage Group, an Alexandria, Va.-based advisory and brokerage firm, had launched a bid for a $1.6 billion package of mortgage servicing rights from Fannie Mae, Freddie Mac and Ginnie Mae. Bids are due July 12.
Prestwick’s offer follows a separate package deal recently announced by Incenter Mortgage Advisors that involves a $915.8 billion package from Fannie Mae and Freddie Mac MSR. Bids on this package were due June 23.
Piercy said Incenter is also working on several deals totaling more than $60 billion “that aren’t up for public auction.”