Is Now the Time to Enter the Servicing Arena?

Over the past three years the sale of bulk servicing rights has been anemic, that is, unless Uncle Sam (namely the FDIC) has been the one doing the selling.

It's safe to say that the golden days of selling both "flow" and "bulk" servicing rights are a thing of the past. Then again, I'm not ready to carve in stone the epitaph of MSR brokerage industry. With both housing and MSR values tanking the past three years the advisory firms that play in this space have survived quite well (or so it appears) by doing other things such as servicing evaluations, whole loan trading, and as auctioneers of nonperforming and subperforming mortgages, in particular “scratch and dent” loans.

In other words these advisors—Interactive Mortgage Advisors, MIAC, MountainView, Phoenix Capital, Prestwick Mortgage Group, among others—have done what smart businesses do: when faced with lemons they've made lemonade.

It appears their strategy is working, but the large question facing these firms and the industry at large is the future of mortgage servicing. With a little luck, delinquencies have already peaked and will continue their decline throughout the new year.

But the elephant in the room is the future of Fannie Mae and Freddie Mac. These two GSEs, in theory, control about 60% of all outstanding mortgages in the U.S., or about $5.6 trillion in loans. As a technical matter, they actually own the underlying MSRs, though as we all know, mortgage bankers far and wide are the ones who receive the servicing strip (income) on the loan.

As the housing crises worsened it's no secret that Fannie and Freddie occasionally yanked away MSRs from top (and lower) ranked firms that weren't up to the task of handling "high touch" product. The irony here is that the GSEs may be controlled "instruments" of the White House, but they want to be paid, too. They're not running charities and the Mortgage Bankers Association and other trade groups are keeping a careful eye on the two and how changes to their charter will affect servicing contracts going forward.

But getting back to the future of servicing: I'm not convinced that the big banks will continue to control the receivables market the way they have in the past. The top five as a group—Bank of America, Wells Fargo, Chase, CitiMortgage and ResCap/Ally Financial—together service 64% of the nation's mortgages, down slightly from two years ago when it looked like the big boys were going to gobble up the entire mortgage pie.

Changes coming under the Basel III accords will make MSRs a less valuable asset to hold on the balance sheet of depositories and there's growing evidence that some of the megabanks are looking to lay off their servicing risk to third-party firms such as IBM's Wilshire Credit Corp. As we noted a few issues back, JPMorgan Chase has already transferred several billion dollars of MSRs to IBM/Wilshire with more on the way. (IBM continues to be mum on the whole affair.)

There continues to be plenty of talk too about how private and publicly traded REITs may step into the servicing game because they have both the capital and the ability to avoid being regulated (as servicers) by the FDIC, OCC, OTS, take your pick. In short, REITs are not banks.

Of course, it's always possible that Congress may enact legislation to introduce national servicing standards, but with the GOP firmly in control of the House I wouldn't bet on it. Additional servicing regulation could happen in the states with licenses being required but, again, with the GOP in control of more state houses I wouldn't bet on that either. Right now, the only thing mortgage professionals can count on is uncertainty. And with uncertainty comes opportunity.