After a couple of new government-sponsored enterprise-backed mortgage servicing rights deals went up for bid following the federal officials’ latest interest rate hike, some in the market opined on how MSR buyers and sellers may change their strategies going forward.
One of the portfolios up for sale, a $4.8 billion MSR package that the Mortgage Industry Advisory Corp. put up for bid, involves a portfolio with a fairly typical California concentration and the following weighted averages: loan age, 31 months; delinquency rate, 0.34%; credit score, 762; and interest rate, 3.225%. The breakdown of credit issues based on days payments are late is: loans 120-plus or in foreclosure, 0.17%; 30 days, 0.14%; with the balance being split roughly evenly between 60 and 90 day buckets. The weighted average loan-to-value ratio based on MIAC’s formula is 68.47%.
The other package, a $915.8 million servicing deal that Incenter put up for bid on Thursday, has weighted averages as follows: age, 16.5 months; FICO score, 753.2; and interest rate, 3.148%. It has no reported delinquencies, foreclosures or bankruptcies. The bulk of the loans in the offering have loan-to-value ratios below the 80% maximum ideally preferred by the market to address the risk of a housing downturn that would deplete equity, but a small number do go as high as 105%. The highest concentrations of loans based on balance are in Connecticut, New York, Massachusetts and California.
With the most recent weekly average for mortgage rates at 5.78%, the risk these loans could runoff due to a refinance has fallen dramatically, which could be a plus for some MSR investors even as it reduces lenders’ loan volumes.
“The latest numbers from [GSE] Freddie [Mac] have brought the high-quality refinance population to its knees, just 472,000 remain,” Black Knight, a mortgage technology and data provider, said in a report Thursday. “This is the smallest this population has…been since at least 2000, when we began tracking this metric.”
The reduction in prepayment risk goes a long way toward maintaining the attractiveness of mortgage servicing rights.
“The Fed’s 75 basis point increase — their biggest move in decades — confirms the significant increases in MSR values that we’ve seen this year,” said Tom Millon, U.S. CEO of Computershare Loan Services, in an email. “We have already seen significant MSR activity in the first half of the year and activity continues to grow on the heels of the Fed’s rate increase.”
However, until there is a drop in inflation, which is anticipated to follow the Fed’s hike, credit risk could be growing for consumers as the costs for goods and home financing both remain high, some experts noted.
“Consumers need to decide where to allocate funds and how much housing costs can eat into their household budget. People will be forced to choose between putting food on the table, paying bills or making their mortgage payment,” said Yatin Karnik, a former senior vice president in Wells Fargo’s home lending division and the founder of Confer Inc., a digital mortgage firm specializing in affordable housing.
These developments may have knock-on effects for mortgage companies as reduced originations could start to diminish liquidity, and prompt servicing arms to devote more resources to addressing the needs of distressed borrowers.
“Price competition and margin compression will contribute to the necessity for originators to get more strategic about all aspects of their business, that includes servicing,” said Bill Shirreffs, head of MSR services and sales operations at Mortgage Capital Trading, a capital markets advisory and technology firm.
At the same time, MSR market participants are becoming more focused on credit.
“Applying static multiples across all LTVs and FICOs will naturally expose buyers to the increased potential of ‘adverse selection,’ heightening the importance of developing a more strategic, more granular approach to pricing,” Shirreffs said in an email.
MSR buyers could be watching LTVs and geographic concentrations particularly closely given signs of softening in a housing market where prices are likely to hold up better in some areas than others.
“The value of your collateral is going to go down because the days of borrowing at very low rates are over,” said Ran Elisaf, founder and managing partner at Northwind Group, a real estate private-equity firm in Manhattan, in an interview. “Every underwriter, every special servicer will need to adjust that to the specific supply-demand trends of local markets.”
To be sure, while the housing market has slowed a little and rates have risen, from a historical perspective delinquencies and foreclosures remain relatively low. Also, while refinance savings potential and prepayment risk have fallen, some is still in play. The rate-incented refinance candidates remaining in the market still could save an aggregate $143 million or $309 per month in principal and interest payments, according to Black Knight.
Bids must be submitted for the MIAC portfolio by 5 p.m. Eastern on June 28. The bids for the Incenter MSRs are due at 2 p.m. Mountain time on June 23.