Note: Paul Muolo is out of office today but this column, written a year ago, appears. His “early” take on why smaller shops are keeping MSRs turned out to be spot on.
One tenet of real estate investing is that you never should sell a home in a down market. And one tenet of mortgage banking has always been that you don’t sell servicing rights in a down market either.
Of course, since the housing bust three years ago, few large bulk “healthy” MSR packages have changed hands, unless the government’s been involved. But it appears that a sea change could be in the making regarding which firms service America’s home mortgages.
It’s no secret that the nation’s megabanks have seen their MSR portfolios slide in volume the past year. Among the top five ranked servicers, just one firm, Wells Fargo & Co., managed any growth in the first quarter, and that bank’s growth was negligible at best: 1%.
Indeed, Bank of America and JPMorgan Chase are in no rush to keep MSRs (see related story on B of A in this issue), which raises the obvious question: Where are all these MSRs going to reside?
Deborah Martin-Dominick, vice president of business development for Round Point Mortgage Servicing Corp., Charlotte, N.C., thinks she may have a partial answer: smaller shops (banks and nonbanks alike) are holding onto their MSRs instead of selling them “servicing released” on a flow basis.
Round Point is a relatively young subservicing shop that focuses on both distressed MSRs, and handling performing servicing chores for others. She said Round Point has one bank client that it services 10,000 loans for. Although she could not name the shop because of confidentiality clauses, she said the firm has other clients as well—and Round Point’s base of customers is growing.
The trend toward smaller shops keeping their MSRs began after the mortgage bust when the price that aggregators (the megabanks again) offered for the servicing-released premium began to drop.
Glen Corso, managing director of the Community Mortgage Banking Project, is quick to point out that many of his smaller to midsized members are fed up with SRP prices. “A lot of our members feel they are not getting properly compensated for the SRP,” he said. “It just makes more sense to keep the servicing.”
But if a small to midsized shop wants to keep the servicing strip that means it will have to handle the processing chores as well. And that’s where subservicers like Cenlar, Dovenmuehle, LoanCare Servicing Center, Round Point and others come in.
If the originator of the loan does want to invest in the start-up cost of entering the servicing business, it can subcontract out the processing task to a subservicer, splitting the 25 basis point minimum fee (on a GSE loan for example) with a contractor of their choice.
Servicing advisors and subservicers aren’t all that eager to give out the names of their client base for fear of losing a customer to a competitor, but one analyst told me he’s been working with a mortgage banking firm that has grown its MSR portfolio to just over $1 billion in the time span of just 18 months.
“Listen,” he told me, “the meltdown in the mortgage business has been great news for subservicers. With all the regulators piling on about robo-signings and with Basel III rules [putting caps on MSRs and capital] this has been terrific for them.”
George Christo, executive vice president of The Prestwick Mortgage Group, Alexandria, Va., has a slightly different take on the trend: “There are firms out there that didn’t have any of the legacy issues tied to the 2004-2008 book of business. It’s a very easy economic decision to make—pile on and keep all the new stuff,” he said.
