Tom Piercy and Bob Dowell are Managing Director and Managing Director, Analytics, respectively, of Incenter Mortgage Advisors, Denver, which provides trading and advisory services for mortgage servicing rights and whole loans. Contact them at [email protected] and [email protected].
Pamela Hamrick is President of Incenter Diligence Solutions, a provider of due diligence and document management services for the mortgage industry. She is reachable at [email protected].
Mortgage servicing rights trading has remained brisk thus far in 2023. To help buyers and sellers capitalize on this important strategy while minimizing their risks, MBA NewsLink interviewed Tom Piercy, Managing Director, and Bob Dowell, Managing Director, Analytics, with Incenter Mortgage Advisors and Pamela Hamrick, President of Incenter Diligence Solutions.
MBA NewsLink: How would you characterize the MSR trading market so far this year?
Tom Piercy: It’s been robust so far–similar to what we saw in 2022, when volumes were exceptionally high and values increased in sync with higher interest rates. Lenders continue to offer large MSR portfolios of 2020 and 2021 mortgage originations, and the rights to service them are attractive to buyers because of their low prepayment risk. Buyer demand, in turn, is motivating sellers who want to increase their cash position or pare back MSR portfolio size by unloading some assets.
Trading itself is also changing. Technological advances are enhancing participants’ ability to optimize trading results, and act with more speed and agility. Throughout this process, though, due diligence is important for lowering buyers’ and sellers’ short-term and long-term risks.
Bob Dowell: MSR hedging has become increasingly vital. Fair Value accounting allows the MSR asset to be written up in line with interest rate increases, which have been significant, but MSRs must be written down when rates move down. Lenders are recognizing that loan origination profitability does not compensate for any writedowns in this current environment and hence, MSR hedging is the best alternative to lock into value and not take a writedown. When lenders have not switched to Fair Value accounting, hedging has allowed these asset holders to make that change. This gives them an immediate boost to earnings as they switch accounting methods, and also reduces earnings volatility.
NewsLink: What is different about risk management in the MSR trading arena?
Pamela Hamrick: Many different parties have jumped into MSR trading—from lenders and servicers to institutional investors and private equity firms. They’re entering a market with less defined due diligence and reporting processes than they’d find on the whole loan trading side. Whole loans, for example, can be traded utilizing a reliance letter. That standard doesn’t exist in the MSR trading world, and every buyer will have different criteria and risk tolerances, as well.
There are multiple risks associated with the history of the loans that buyers want the rights to service. These loans may have been originated long ago, when underwriting guidelines were different. Underlying files may also have mistakes and omissions that have been carried forward for years. During acquisitions, they could have been transferred from servicer to servicer with no-one noticing.
Uncovering those kinds of issues on the servicing side is particularly critical. Buyers do have the recourse of moving rights back to the seller, but everyone wants to avoid that hassle factor, not to mention the costs and lost opportunities.