NOV 14, 2012 11:01am ET

MSR Deals Hot Now But That Could Change Soon

NOV 14, 2012 11:01am ET
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When JPMorgan Chase was recently unveiled as the winning bidder on MetLife’s $70 billion residential servicing portfolio, some in the industry scratched their heads.

As one advisor who tracks the market quipped: “It’s the first time Chase showed up in years.” (No purchase price was disclosed on the deal.)

Although a spokeswoman for JPM declined to discuss the purchase in detail, a statement released by MetLife (which quotes JPM executive Eric Schuppenhauer) suggests that the megabank may’ve changed its mind about the servicing side of the business.

“The acquisition of this high-quality portfolio reflects our strategy to strengthen and grow our servicing business,” said Schuppenhauer. “We will be able to provide our full range of products and services to an additional 350,000 individuals and families. We expect that many of these customers will take advantage of historically low interest rates by refinancing.”

But the statement also suggests that the bank is more interested in the fee income it can make from refis as opposed to servicing fees.

Over the past few quarters JPM has been shrinking its MSRs, even selling some of its receivables. In 2Q its MSRs declined by 9%, in 1Q 8%.

But with the MSRs of the now-defunct MetLife Home Loans soon to be under its belt, the decline has been reversed, which could mean that some banks, after shrinking their investment in servicing, may see value in the product.

As most servicing professionals realize, it’s a buyer’s market for MSRs. In short, there’s plenty of product to be had. As Michael Carnes, senior vice president of the capital markets group at MIAC Analytics, New York, recently told clients, “For those contemplating the purchase of servicing, consider the following: Beyond doubt, mortgage servicing rights values remain at historically low levels, potentially creating one of the best buyer’s markets in history. Prices for servicing have dropped to very attractive yields relative to the risk profile of the asset class.”

According to figures compiled by National Mortgage News and the Quarterly Data Report, almost $700 billion of servicing rights are in some stage of auction or sale.

By now, the reason for it being a buyer’s market are well known: pending Basel III capital rules make holding MSRs more difficult and expensive for commercial banks; delinquencies are still high, though falling noticeably from last year and the year before; and lastly, prepayment speeds are accelerating thanks to record low mortgage rates. (Representations and warranties are also an issue.)

The only good news on prepayment speeds is that they’d be even faster if it weren’t for ultra-tight underwriting standards.

As far as pending deals are concerned, two sales represent a majority of the soon-to-transfer market: $374 billion of MSRs that belong to Residential Capital Corp., which are slated for sale to Ocwen Financial and Walter Management, and $122 billion of product being offered by Ally Financial, the parent of ResCap.

Ocwen also is scheduled to purchase $74 billion of product when it closes on Homeward Residential, a shop being sold by bottom fisher WL Ross & Co.

Up until early November, the largest “un-attached” portfolio was the MetLife package. Meanwhile, rumors abound that Bank of America might soon unload a large chunk of its $1.5 trillion portfolio but so far the bank has said little about the topic.