In 2024, the MSR market saw nearly $888 billion in agency MSR transfers, representing a slight decline of 4.3% year-over-year but still ranking as the fourth highest annual volume since 2015, according to Inside Mortgage Finance. In this edition of NTC Coffee Talk, we chatted with Danny Byrnes, Covius Chief Revenue Officer, about some of the pain points and risks that can create cost and compliance issues for both MSR buyers and sellers.
Q: Let’s start with what you are seeing in terms of the overall MSR market?
Byrnes: We’re still seeing a very active MSR market, with strong demand from both established players and those looking to expand their portfolios. While overall transfer volume dipped slightly year-over-year, activity remains elevated by historical standards. There’s also a noticeable push among certain large institutions to rebalance or streamline their holdings, often selling off at early signs of delinquency. At the same time, several national buyers are leaning into growth, taking advantage of market shifts and consolidation trends.
Consolidation within servicing and subservicing sectors is also contributing to the shift in MSR and servicing ownership. Recent consolidation examples include last year’s Two Harbors/Roundpoint deal, Rithm Capital’s acquisition of Specialized Loan Servicing, Mr. Cooper’s acquisition of Flagstar’s mortgage operations and now Rocket’s play for Mr. Cooper (to close later this year).
The prospect of future interest rate cuts, which have the potential to reduce MSR values but restart refinances, may also be a factor later this year.
Q: What are some of the pain points that buyers and sellers face in these large-scale transactions?
Byrnes: The sheer size of some of the deals requires a significant number of resources. In some cases, all the work may be done in-house by the buyer or seller, but in many cases, a variety of vendors are involved to price the assets, conduct diligence on the loans, on-board the assets, perfect the collateral, register the transfer of ownership with the counties and make the appropriate transfers within MERS.
Sellers often look for help in identifying which assets they want to sell and how much work they want to do on these assets, pre-sale.
Investors are looking for confirmation that what they purchased is what the seller represented and warranted.
Then there is the whole issue of the complexity and quality of the mortgage assets. How compliant was the initial underwriting? Has the value of the asset been QC’d and confirmed? What about the quality of the collateral? Are all the necessary documents in the file, or are there missing mortgages, title policies, assignments of mortgage, promissory notes, endorsements, etc.?
And if there are issues, how big is the problem—are you missing dozens of title policies or hundreds? The sooner these issues are uncovered the better, because while it might cost $35 to discover that you need a new lender policy and then another $500 or $600 to issue a new one, that’s significantly less expensive than buying back a defective loan, as many MSR transfer side letters require. Additionally, securitizing a pool of loans can demand faster turn times on perfecting the collateral.
When you are looking at a common MSR sale of 5,000 to 10,000 loans, roughly 3 or 4% are probably in some form of modification. In-flight mods are a perfect example of what can go wrong if the buyer and/or its vendors aren’t tracking these deals closely. If something does go wrong, you may not only have a disgruntled borrower but also the potential for a difficult oversight audit or even worse, findings from a regulator.
Past servicing problems also have a way of causing downstream issues if not caught or confronted during the review process of an MSR transfer. How is the integrity of the data, and is it processed to be mapped correctly? There are many issues to think about when building out review criteria. Examples include late charge calculations, ARM information, UPB vs. modified principal balance vs. original loan amount, borrower and/or property characteristics, etc. Misreading these issues or incorrect data mapping will make things difficult downstream.
The bottom line is this: when you consider all the moving parts and elements that can go wrong in large scale deals, you realize how important a solid MSR transfer process and workflow is.
Q: So, what would a more efficient, scalable approach look like?
Byrnes: Today, various Covius entities help buyers and sellers address many parts of the deal workflow. Clayton does a significant amount of due diligence for MSR investors, including Servicing Oversight and MERS QC. The servicing oversight is key here, and often overlooked, as it addresses not only loan-level testing but also policy and procedure review. NTC does large-scale remediation of problems with hard loan collateral: identifying missing documents, broken chain of assignments, title policy recovery or replacements, and facilitating any assignment of mortgage recordings or allonges needed, including getting the portfolio registered and assigned into MERS for an upcoming sale.
Covius’ national title company, critical documents group, modification services team, valuation services and HOA monitoring teams can all be easily plugged into the overall workflows on a transfer. This can minimize the number of vendors, oversight or in-house personnel needed while maximizing the efficiency and coordination between each milestone. I know our approach is accelerating and de-risking transfers while helping buyers and sellers achieve their goals with greater efficiency.
Covius is positioning itself as a full-service MSR transaction partner, capable of streamlining and de-risking the full lifecycle of bulk servicing transfers. In a market where billions are at stake and small oversights can become large liabilities, our integrated model helps buyers and sellers keep control of cost, compliance and execution.