A quick glance at the first-quarter earnings reports of the nation’s megabanks reveals that these servicing-rich companies are continuing to mark down the value of their MSRs like there’s no tomorrow.
Bank of America, which is saddled with billions of dollars in problematic MSRs inherited from Countrywide Financial, trimmed the asset value on its servicing portfolio by almost 19% year-over-year. At March 31, the value of its MSRs stood at $15.3 billion compared to $18.8 billion 12 months earlier.
Over at JPMorgan Chase—the nation’s No. 3 ranked holder of MSRs—the haircut was somewhat similar: 16%.
Not to be outdone by these two was Citigroup, which took a stunning 27% beating, valuing its servicing rights at $4.7 billion compared to $6.4 billion at March 31, 2010.
The only one of the “megas” that escaped relatively unscathed was Wells Fargo Bank, which actually marked up the value of its servicing portfolio—but by a mere 1%.
The reason for the markdowns is hardly surprising, of course.
Not only are MSRs worth less because of delinquencies and foreclosures, but the highest-quality receivables have been running off due to last year’s refinancing boom.
Then there’s the issue of the Basel III accords which dictate that by decade’s end MSRs cannot count for more than 10% of a depository’s equity.
The current cap is 100%.
But although most of the nation’s megabanks have been getting their MSR valuations in order (so to speak), there’s also a school of thought that says the slashing of valuations soon may be a thing of the past. Until recently, mortgage rates were on the rise, which means future run-off should be minimal.
“MSR markdowns are definitely slowing—and for a number of reasons,” said Tom Piercy, managing member of Interactive Mortgage Advisors, Denver.
“All the legacy problems we’ve been hearing about for the past three years are finally waning. But don’t get me wrong—the problems haven’t all been solved.”
Piercy, whose firm is involved in both evaluations and sales, is quick to note that although values should be stabilizing, that doesn’t mean the secondary market for MSRs will soon blossom.
“Market value is a completely different issue,” he warned.
Servicing advisors the likes of IMA, MIAC, MountainView Risk Advisors and others believe now is a great time to purchase MSRs—but that doesn’t mean buyers will be stepping up to the plate any time soon.
In short, there is still too much fear in the market—over not only the “robo-signing” scandal and regulatory consent orders, but how (or if) Fannie Mae and Freddie Mac will tinker with the 25 basis point minimum servicing fee they pay to servicing rights holders.
Industry officials close to the issue say Fannie Mae is strongly advocating that the minimum fee be slashed to 12.5 basis points, but would truly like to see a 5 basis point fee.
Sister agency Freddie Mac is leaning toward making no change whatsoever, with the Government National Mortgage Association (Ginnie Mae) taking a somewhat similar position.
Officials at the GSEs and GNMA aren’t openly talking about where they stand on the issue—at least not to the trade press.
Meanwhile, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, appears to be taking a hands-off approach, allowing their wards to steer the process.
Further complicating the whole matter is the fact that Fannie and Freddie are now reporting operating profits, which means any major overhaul of how they conduct business may completely fall apart.
One servicing analyst, requesting anonymity, summed up the situation as follows: “Maybe it’s me, but I’m starting to get the feeling that changing servicing compensation is no longer the pressing matter it was earlier in the year.”
