Huge MSR portfolio could herald supply influx — sources

03 October 2017

A massive USD 9.6bn MSR portfolio unveiled by broker Incenter Mortgage Advisors last night may be the first of many large servicing pools that a recent uptick in interest rates will draw to market, according to an MSR trader and a mortgage servicing rights analyst.

An increase in prices over the past six months won’t hurt either, according to the trader. Incenter is marketing servicing rights to Fannie Mae and Freddie Mac mortgages, which are trading at 4x-4.25x multiples of their monthly servicing fees, up from 4x six months ago, according to the trader.

Some of that increase may be due to a shortage of supply. Ten-year US Treasury rates dropped from yields as high as nearly 2.4% in July to under 2.2% in early September before rebounding recently, according to the Treasury Department. The 3Q17 dip cut prices, and supply, according to the analyst. Buyers are reluctant to commit to MSRs when rates are low, and refinancing rates high. But a recent rebound in Treasury rates is likely to bring back sellers, and prices, according to the analyst. Ten-year Treasuries were trading at a 2.34% yield on Monday, according to the Treasury Department.

Ginnie Mae servicing is following a similar tack, albeit at prices back of Fannie/Freddie MSRs. Ginnie MSRs are being talked at prices as high as a 3.5x multiple, but effectively trading at 3x following due diligence reviews and final bids, according to the trader. Six months ago, Ginnies were trading under a 3x multiple, he said.

If rates continue their upswing MSR prices are likely to continue rising, according to the trader. The Federal Reserve is widely expected to raise rates again in December.

The Incenter pool consists of servicing rights on 39,852 loans with an average balance of USD 241,668, average rate of 3.936%, average seasoning of 15.4 months and average monthly servicing fee of 25.21bps, according to a source familiar with the pool. All of the loans are current.

The loans are located nationwide, with concentrations in California (35.4% by balance), Florida (7.4%), Colorado (5.6%) and Michigan (5.2%). Average borrower Fico is 756.

While the agency and government servicing market is active, the non-agency servicing market is less so, according to the trader. Small batches of jumbo mortgage servicing trade from time to time, but “back of Fannie/Freddie’s” because they prepay faster, he said.

To date, the trader hasn’t seen any non-QM servicing in the market.