Two Harbors is buying rights to generate interest-only revenue as a hedge against other mortgage-market investments rather than to make money servicing the loans, Siering said.
“It’s not our desire to be in the origination business or to actually service the MSRs, but rather be a capital partner to those who do originate and do service,” he said.
Partners like Two Harbors open opportunities for banks to sell the rights while continuing to service the mortgages, a “work around” for Basel III, according to Rick Sharga, executive vice president of Auction.com. Banks can add liquidity by unloading servicing rights, eliminate some risk and then, if they get a subservicing contract, get paid to continue to do the same work, he said.
“That’s not a bad deal if you can pull it off,” Sharga said in a telephone interview. “It’s probably something we wouldn’t have seen absent Basel III requirements. But in an odd way, it has a certain logic to it.”
While banks sold off portfolios with high delinquency rates, they also sought to retain or acquire pools with high quality borrowers who provide steady payments at little cost.
“As part of our strategy to strengthen and grow our servicing business, we continually look at opportunities to buy and sell mortgage servicing rights,” Amy Bonitatibus, a spokeswoman for JPMorgan, the second-largest servicer with $1.06 trillion in collection rights, said in an email. She declined to answer specific questions on the bank’s plans for the unit, which generated $133 million in pretax revenue for the quarter ending June 30, according to a filing.
Private equity firms are buying because they can earn as much as 9%, more than many other mortgage assets, said Dan Thomas, managing director of MIAC Analytics, a broker in New York.
“It’s a much stronger market than it was a year ago because of the private equity guys,” said Thomas. “It took them awhile to get their ducks in a row. This isn’t the same as buying a security. You have to have the infrastructure in place to take on the operation or a subservicer lined up to do it for you.”