Cash-Strapped Servicers Fill Gaps by Borrowing Against Their MSRs

Mortgage bankers facing new demands on their businesses are becoming increasingly interested in new sources of liquidity, particularly through mortgage servicing rights financing vehicles.

MSR financing vehicles allow servicers to use their servicing portfolio as collateral for a year-long line of credit or loans that can range from two to seven years. Fannie Mae, Freddie Mac and Ginnie Mae all require servicers to obtain permission before executing a deal involving agency MSRs.

Lenders can also sell their servicing, or at least a piece of it, if they need to raise cash and it's often worth any ensuing loss of control over it.

"My sense is that this is going to be continually growing, especially if rates are going to rise," Austin Tilghman, chief executive officer of United Capital Markets Inc., told attendees during a May 18 session at the Mortgage Bankers Association's Secondary Market Conference in New York City.

The Federal Housing Finance Agency issued final minimum financial requirements for lenders who sell loans on a servicing-retained basis to Fannie Mae and Freddie Mac, including higher capital and liquidity standards.

Mortgage bankers may also be more interested in supplementing their available cash if interest rates rise and origination volumes fall or shift increasing toward lower-margin purchase loans.

When rates unexpectedly dropped earlier this year, lenders were mostly concerned with rushing to originate higher-margin refinance loans and contending with servicing runoff.

But in noting the importance of their servicing as a basis for borrower contact and retention, some have been considering additional expenditures for strategic changes they may need financing for, said David Fleig, president and CEO of MorVest Capital, in an interview at the conference. Some, for example, are starting to think about bringing their servicing in-house because they want more direct control over retention, he said.

That choice comes with significant upfront costs and MSR financing and may be one way to finance them, Fleig said.

"If they bring servicing in-house, they have to pay for software, people and regulatory compliance," said Fleig.

There are other options as well, but MSR financing may be the most cost-effective, he said.

Some MSR investors have moved in and out of the market but there are still plenty interested in buying, including banks if they've found they can buy within new Basel III capital restrictions, Mark Garland, president of MountainView Holdings, told conference attendees.

"We absolutely have seen banks come back," he said. Some market participants in the private equity sector that has recently dominated the market pulled back a little at one point, but several came back, Garland said.