M&A Market Heats Up

The predictions keep rolling in: within a few years, there will only be five mortgage servicers of consequence. While that is probably a dramatic exaggeration, there is a growing consensus that consolidation will continue. During the refinancing binge of recent years, the opposite has been true, a fractious loan origination market and heavy loan turnover actually cost the top servicers some market share as a group. But the long-term trend seems clear: a few big players will likely dominate the mortgage industry.

Already, top originators have been increasing their share of the market, and with lending volume slowing down, that could portend a return to consolidation on the loan servicing side of the business as well. Some small players, burned by portfolio churning and impairment writedowns to their mortgage servicing rights, will consider exiting the business. And with rates on the rise, MSR values are going to start creeping up as well. That will give some fence sitters an impetus to dump their mortgage servicing portfolios into the market.

And mega-servicers, concerned about keeping their shops running at full throttle to maintain economies of scale, will want to add volume to their portfolios. With the origination market declining, some will turn to the market for purchased mortgage servicing rights.

But before the bidding war for MSRs heats up, we think it's useful to remind the industry that just a few years ago some lenders got burned by paying too much for mortgage servicing rights.

Nobody could have anticipated how low interest rates would go and how long they would stay low. But in some cases, participants in the marketplace for bulk MSR transactions in the past made overly optimistic assumptions about how long loans would stay on the books. If we learned one thing from the refi boom, it's that you never know when another refi boom might pop up.

And while technology advances have dramatically reduced the cost of performing loan administration functions, some trends have actually driven up the cost of servicing recently. Just ask any subprime lender about the impact of increased regulatory scrutiny and compliance pressure, and you'll understand that things can change for the worse.

We look forward to seeing a healthy M&A market, but at the same time we hope bidders don't get carried away.

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