As coronavirus strains mortgage servicing, co-issuing gets tougher
Lenders that partner with mortgage-servicing rights investors when they sell loans are experiencing a new strain due to coronavirus-related developments.
MSR buyers who, even before March, were becoming less active due to relatively higher prepayments this year, have limited their investments even further in reaction virus-related market volatility.
"We're starting to see folks entirely suspend purchases in some cases, or, in other cases, they are still buying, but the price is half, for example, of what it was a month ago," said James Baublitz, product manager for Black Knight's CompassPoint servicing and pipeline hedging analytics.
Some co-issue buyers confirmed that they are still in the market but indicated that their interest is limited or selective.
"We'd curbed that over the previous four or five months," said Stan Middleman, CEO of Freedom Mortgage, when asked about his company's involvement in the co-issue market. "We still do some. We're honoring all of our commitments."
Servicer BSI Financial also confirmed that it is still buying MSRs, but it is doing so “opportunistically,” said Senior Vice President Allen Price.
The contraction in co-issue activity will force some lenders that had been working with servicing investors to find another route through which they can sell their servicing into the secondary market.
"Folks who are used to, perhaps, an agency delivery where they are selling the loans via co-issue are now starting to think about an alternative delivery strategy, be that retaining servicing or selling [the loan] servicing-released to an aggregator," said Baublitz, who noted that aggregators' bids for loans have declined, too.
The impact of the decline in co-issue demand and pricing on lenders depends on how reliant they've been on a co-issue arrangement and for how long, as well as what markets they are active in.
(Ginnie Mae's recent launch of assistance for issuers that request help with servicing advances could eventually have positive implications for MSRs from government loans, but co-issue activity in that market segment was limited to begin with.)
"Some folks look at a servicing-retained valuation [for their loans], they look at a co-issue bid or two and they look at released as just a normal course of business. They have all the options available to them. Other folks technically do, but it's been years since they sold [loans servicing-released], perhaps, and perhaps they've never once retained [servicing on] a loan. Or maybe they did in the very beginning, but it's not something they are super-familiar with," said Baublitz. "So the ability to pivot on a dime can be limited for a lot of folks. They can do it, technically, but it's not something they can do overnight. Some lenders can, but some can't."
As a result, certain lenders may be looking at retaining servicing for the first time in a while.
"It's not a bad thing, of course, but it's one of those things where now they have to really make sure they know what they are getting into because it is a little more complicated than it was say a month ago," Baublitz said.
Getting a subservicer to handle the operational complexities is an option for these lenders, and there appears to be more bandwidth in the market to address this option than to buy MSRs in some cases.
For example, "BSI Financial has plenty of capacity to handle an increase in subservicing volume on a performing and nonperforming basis," Price said.