The mortgage service rights (MSR) market has opened 2023 with a healthy volume of capital committed to purchase the asset, along with multiple sellers ready for deals – as evidenced by the $60 billion to $65 billion in MSR portfolio offerings currently offered, market experts have a say.
However, that good news is being overshadowed for now by what MSR market sources are describing as a rumored series of record-sized planned MSR offerings reportedly being prepared by banking giant Wells Fargowhich last week officially announced plans “to reduce the size of its service portfolio”.
An MSR market source, who requested not to be named, said rumors of a possible mega-offering from Wells Fargo or a series of offerings surfaced late last year and became urgent again with Wells Fargo’s recent public announcement.
“We started hearing in the fourth quarter that they would come out with a $100 billion to $150 billion conventional price (Fanny Mae and Freddy Mac MSR]offering, and they would follow that with $100 billion to Ginnie” [MSRs]’ said the market source. So with Wells Fargo’s announcement rumored to have $250 billion in MSRs [based on loan volume serviced] which will be made available.”
Fannie and Freddie buy and securitize conventional mortgages that meet their guidelines. Ginnie Mae guarantees mortgage-backed securities issued by lenders that make loans through government-backed housing programs, such as the Federal Housing Administration.
While the potential offering of the Wells Fargo MSR package still falls into the “market rumor” realm, MSR experts say, those rumors have an immediate impact on the MSR market. They say such a massive volume of MSR offerings hitting the market in a short amount of time would affect pricing and liquidity – at least at the high end of the market.
“While I can’t confirm or deny the volume Wells plans to release, what you’ve heard seems consistent with what we’re also hearing,” said Mike Carnes, general manager of the MSR valuation group at MIAC analysis, which provides MSR advisory services. “Although I don’t think it has a big impact on the liquidity of deals under $3 billion, Wells [assuming the rumors about the bank’s planned MSR sales are accurate] may very well affect the liquidity of $10 billion and larger deals.
Carnes said MIAC currently has three MSR packages up for bid or about to be priced, which together are valued at more than $4 billion based on the loan portfolios to be serviced. The MSR deals include various combinations of loans backed by Fannie Mae and Freddie Mac and/or Ginnie Mae.
“If Wells saturates the market with mega offers, they could very well drive the bigger buyers out of the market in the near future,” added Carnes. “Basically, too much supply equals lower prices.”
Adding some credence to the rumors of a pending massive supply of MSR assets, industry publication Within Mortgage Finance recently reported that its investment banking sources indicated that an $85 billion portfolio of MSRs was being readied for sale by an unspecified seller, a deal that could potentially be cut into two packages. The publication also reported speculation that the seller could be Wells Fargo.
Carnes and other experts at MSR consulting firms say the beginning of the year is when MSR buyers have new budgets and sufficient capital. Those buyers can be banks, independent mortgage banks and private investors, some of which are backed by private equity firms.
“If one or two companies come forward and buy everything [any large Wells Fargo MSR offerings], it has very little impact,” Carnes said. “If it’s spread out over a period of years, with multiple big offers and multiple buyers, it can become difficult for someone else who wants to sell in larger quantities.
“To avoid potential market saturation, look for sellers to accelerate the sale of their MSRs, hoping to gain an edge in the market while buyers still have the budget and bandwidth to buy.”
Tom Piercy, general manager of Incenter Mortgage Advisersanother major player in the MSR space, added that this year “a huge amount of capital has been committed to the asset [MSRs].”
Incenter is acting as an advisor to approximately $17 billion in MSR portfolio offerings in three deals currently being written, plus another $9 billion unauctioned private deal now in the works. The three MSR packages up for public auction, all with bid expirations in January, include a bulk offering of $10.2 billion Fannie and Freddie MSRs; a separate $2.1 billion offering from Fannie and Freddie MSRs; and a $4.8 billion jumbo loan service package offered by a bank.
In addition, Piercy said Incenter has an additional $25 billion in MSR portfolio offerings in the pipeline for two other deals. Piercy estimated that as of early January, the entire MSR market, and including “its peers in the industry,” was about $60 billion to $65 billion at stake in the market.
“Normally you have all new budgets at the beginning of the year [for MSR buyers], so you have a lot of capital commitment and people willing to buy,” Piercy said. “So that’s why you try so hard to get those deals out there.
“Well, that’s what all the rumors are about [Wells Fargo] and a plethora of MSR is released.
Piercy said those rumors, whether they turn out to be true or not, are already having a “major impact” on the market.
“This week has been a storm of calls and texts, and [I’m] talking to buyers and getting their take on the market now,” Piercy said. “I have had so many comments about this [Wells Fargo rumor] and whether this will use up all the capital and cause MSR values to fall.
“There are many [buyers that] i feel like there’s going to be a buying opportunity so i’m struggling with this because based on the volume and what’s on offer there’s less than a handful [buyers] who could look at those big deals.”
Due to the limited buyer pool for mega-MSR deals — potentially totaling up to $250 billion in MSR portfolio offerings — Piercy said it’s not clear how the market would ultimately be affected, explaining that the devil always in the details. He said that if Wells Fargo were to move forward with some huge MSR offerings, “there’s a whole different market that will continue in the $250 million to as much as $20 billion range, and there are several buyers operating within that category .”
“It is still too early to say what the selling side will do [if the Wells Fargo MSR-sale rumors turn out to be true]Piercy said. “Each MSR transaction is unique. Not only is the asset itself unique, but the reason for selling is unique, and so that would affect which transactions go through and which are withdrawn.”
“We may know something else by next week. But what we’re dealing with now is… a perceived value issue given the rumored significant volume coming to market as a result of recent announcements [related to Wells Fargo]. So perception is reality at the moment.”
Rob Nunziata, co-CEO of FBC Mortgage, a non-bank seller manager, said more companies are now selling MSRs than in the recent past because of market conditions, with mortgage rates doubling over the past year, causing urgent cash flows for some lenders. “And the number of buyers really hasn’t changed that much…so you have a little bit of imbalance,” he added.
Nunziata, whose mortgage business made about $7.4 billion in loans across all business channels in 2021, said MSR assets also generate “real cash flow” when kept on the books.
“Maintaining books typically yields about 10%,” he said. “There is a good yield from the maintenance book.
“So there is no need to sell it [MSR portfolios] because there is an income stream, but everyone’s situation is different,” Nunziata added. “Some lenders may need to sell maintenance, and if they do, now is probably not the optimal time to do it if they can wait.”
Wells Fargo will seize opportunities
Wells Fargo officials did not respond to a request for comment for this story. Wells Fargo CEO Charlie Scharf, however, said the following on the lender’s recent call for Q4 2022 in response to an analyst’s question about the bank’s MSR portfolio plans:
“The fact that we will produce much less certainly means that the MSR and the overall maintenance book will drop very naturally over time, based on that, over quite a long period of time. But we will also look for intelligent and economical ways to reduce the complexity and size of our maintenance book between now and then. And if they arise, we are certainly interested in them.”
That response doesn’t seem to rule out the possibility that Wells Fargo could receive a mega MSR offering or a series of smaller but still massive deals this year. The bank recently reported earnings of $13.2 billion for 2022, down 39% from its 2021 earnings of $21.6 billion.
In addition to shrinking its MSR portfolio, Wells Fargo, the third-largest U.S. mortgage lender by originations, announced on Jan. 10 that it will remain the correspondent channel, which was responsible for about 44% of the bank’s total mortgage . volume of $14.6 billion in the fourth quarter of 2022. The bank’s mortgage volume in the fourth quarter of 2022 was down 70% year-over-year, HousingWire reported last week.
Mortgage data analytics company Repetition reports that as of the first week of January 2023, Wells Fargo’s total MSR portfolio was $608.2 billion, representing approximately a 7.3% share of the total outstanding MSR volume of $8.37 trillion as of that date – includes Ginnie Mae, Fannie Mae and Freddie Mac MSRs.
Broken down by MSR channel, the lender’s MSR portfolio tied to Fannie Mae-backed loans totaled $269.4 billion as of the same date, or approximately and an 8% market share. The MSR portfolio of Freddie Mac secured loans totaled $226.5 billion, or a market share of 7.9%.
Wells Fargo’s Ginnie Mae MSR portfolio was $112.3 billion in early January, representing a market share of 5.3%, according to Recursion data. The leading MSR managers across all instances as of the first week of January, according to Recursion, include Wells Fargo at No. 1, followed by Pennymac, JPMorgan Chase, Rocket Mortgage, Lakeview loan servicing, Freedom Mortgage, Mr Cooper, Rithm Capital (back in the days New residential area), and United Grand Mortgage.
Piercy said whether or not the rumors regarding Wells Fargo and potential mega-MSR offerings are true or not will eventually come true and that will work its way through the market.
“MSRs have a lot of interest as an alternative investment,” he added. “I was extremely optimistic about the liquidity coming in this year.
“And at the end of the day, I feel like we need to stay bullish, if we can get through this initial reaction what can happen on the market. I think the laws of economics will eventually settle here once there is more certainty.”