MSR prices are rising in line with rates as lender needs shift

The mortgage servicing rights market has been on an upswing as higher rates have given MSRs a cyclical boost. Lenders in search of new customers are motivated to buy these assets at the same time that a combination of cash needs and potentially restrictive policy proposals have put selling pressure on others.

Prices have generally been trending upward in line with rates, according to the Mortgage Industry Advisory Corp.’s Generic Servicing Asset MSR benchmarking tool. In addition, 13 investors have been active in the government market, compared to the only three or four that were buying at one point last year, Mike Carnes, managing director at MIAC, told attendees during a panel discussion at the Information Management Network’s Residential Mortgage Servicing Rights Forum in New York.

“Trading is healthy right now. There's a lot of capital out there. There's a lot of firms that need to put that capital to use or they’re going to lose it,” Carnes said in an interview.

However, stakeholders are also monitoring the liquidity of the Ginnie Mae market closely in regards to whether a proposal that would set new capital restrictions on nonbanks moves forward. Some may be approaching the market with more caution as a result. That proposal is “tougher and more draconian than Basel,” said Chris Whalen, chairman of Whalen Global Advisors, referring to global standards for risk management and capital during a separate panel at the conference.

In addition, concerns regarding one aspect of Biden’s proposed tax plan — the elimination of a deferral on non-cash mortgage origination income from retained MSRs — also persists despite some expectations that it will eventually be resolved, Whalen noted. That also could dampen buying.

While some individual market participants may be factoring these regulatory uncertainties into their decisions about the MSR market, Carnes thinks they’re less likely to upset the current balance of buyers and sellers in the market than the state of lenders’ finances.

“What’s most likely to prompt a new wave of selling more than anything is the need for earnings,” said Carnes. “If margins continue to compress, rates continue to rise and origination volume continues to decline a lot of firms will look at those servicing portfolios as piggy banks for a rainy day fund, but as long as there is capital available and the pandemic’s kept in check there should be buyers.”