MSR Trades: Still Low-Risk Opportunity for Some

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.

MSRs are sold in bulk for a reason. Most of the billions in trades of large portfolios of MSRs continue to make news headlines because the buyers are high net worth entities that can afford the relatively low short-term risk as they plan for long-term gains.

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 Walter Investment Management.

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 Walter executives noted their intention to continue the expansion of its MSR portfolio in 2013. They argued that further restructuring of their servicing business alongside the completion of the transfer of the 2012 MSR assets purchased into the main portfolio will drive down next-quarter earnings before Walter starts seeing returns on their MSR investments later this year and in 2014.

“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.

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