Regulation has created a window of investment opportunity in the current booming mortgage servicing rights market, according to panelists at the 2013 CoreLogic symposium in New York.
Investors are prioritizing, said Dillon Vestal, an advisory and valuation services expert at CoreLogic. “It seems like there’s more agency collateral trading recently. And there’s more of a shift in strategies.”
Some firms are leaving the servicing space. For instance, he said, Alley Financial is trading away its entire MSR portfolio to large-size banks like Nationstar that are increasing their MSR portfolios and moving in the opposite direction.
Sellers of MSR portfolios are more interested in finding investors to whom it makes financial sense to buy in bulk. Hence, most active buyers have been some of the nation’s larger-size firms, such as Nationstar, Ocwen and
The same names are in the headlines because these trades are very large, Vestal said, making it very competitive for the smaller players who may be trying to get involved.
Larger buyers make a better match for sellers like Alley.
Since buyers and sellers are interested in trading the entire portfolio in bulk and they do not want to split these portfolios, he argued, which turns "into a limiting factor for smaller servicers" who do not have the scale needed to manage a largge portfolio with both performing and nonperforming loans, the capacity to service these loans or the resources to hire a subservicer.
It also appears that current buyers have similar long-term strategies.
During its fourth-quarter 2012 earnings webcast
“For Walter to get everything scaled up and ready to operate smoothly for both their performing and nonperforming asset strategy, it’s just a matter of time,” Vestal argued.
Over the long run investors want to be able “to model out future portfolio performance” at the loan level, get very detailed at it and look at how the different economic case scenarios, both optimistic and pessimistic, or a servicer’s choice to modify a loan, foreclose it, or agree to a short sale affect loan performance.
Proposed Basel III regulations are forcing banks to rethink their MSR investment strategies and develop more real-time, realistic approaches to valuing MSRs, he said.