The extent of banks' exit from mortgage-servicing rights, and the arrival of nonbank players, set today's MSR market apart from any other.
That was the conclusion of a panel of nonbank servicing-rights buyers generally at a recent CoreLogic symposium in New York.
Certain banks remain in the market, as
The departures of banks, as well as traditional nonbank players' withdrawal in some cases, have left an opening for hedge and private-equity funds.
"We want to go where the banks are not," said Michael Dubeck, president of Planet Home Lending and Planet Financial Group, which specialize in the origination and servicing of residential mortgage loans and the acquisition of mortgage-related assets.
Dubeck questions whether hedge fund and private-equity involvement is really that different than in the past, given that PE funds have always had some interest.
But this time around it does appear more extensive. This has raised questions about whether funds are establishing more long-term businesses in the market, as opposed to making opportunistic trades that will end at some point when the investment starts to look relatively less attractive.
"We treat it as a business," Dubeck said.
The majority of players will likely view it as a long-term play, but a few see it as a short-term opportunity, said Paul Thomas, chief operating officer of Pingora Asset Management, an asset manager focused on investing in, and servicing of, new production performing mortgage-servicing-rights portfolios.
The MSR market has relatively less liquidity than some other investments, so short-term investing will be a challenge, said Adam Goldberg, a vice president in capital markets at Seneca Mortgage Management, a servicing and investment firm.
"You can't jump in and out of it quickly," he said.
Whether these nonbank players' presence in servicing is permanent is an important question for government entities that have to decide whether to make multiyear investments to accommodate the oversight of these new types of companies, said Michael Drayne, a senior vice president at Ginnie Mae.
"Is this all just going to flip back in two years?" he said. "I wish we had the answer."
Nonbanks do not feel they are any more immune to regulatory pressures than banks, and they may even draw more scrutiny because regulators are less familiar with their business model, according to Thomas.
"There is not an ability to escape," he said.
The biggest challenge in the business is the cost, which the high degree of regulation in the business makes tough to predict, according to Goldberg. "That's what keeps me up at night," he said.
For this reason some buyers are largely sticking to agency and Ginnie Mae servicing attached to postcrisis originations with strong credit profiles, which generally has more predictable and lower costs.
Interestingly, some investors are showing a preference for Ginnie Mae servicing, which has some more relatively onerous requirements attached to it. This is because these requirements make the market for it "much less competitive," Thomas said.
The requirements are "a pain in the neck," but they also are a barrier to entry, Dubeck agreed.
"You go where they're not — that creates value, right?" he said.
