Coffee Talk: What’s Next for the MSR Market and How to Be Ready

Is the Mortgage Servicing Rights (MSR) market about to heat up? For months, observers have been waiting, but like the proverbial watched pot, the market has stubbornly refused to bubble up. There are signs, however, that this is about to change.

In this month’s Coffee Talk, we’ll explore recent market developments and discuss steps that sellers and buyers should be taking to be ready for what’s to come.

In 2022, Inside Mortgage Finance estimated roughly $1 trillion in MSRs traded hands. The primary drivers were relatively strong MSR prices and the need on the part of mortgage banks to replace origination revenue. Beyond profit taking, there are also some other trends driving MSR decisions. For example, some large banks are also using MSR sales as a means of avoiding the reputational risk that comes with foreclosures. So, when a loan goes into default, one possibility, rather than moving into a default waterfall, would be to sell it as NPL. Finally, as consolidation continues within the mortgage industry some acquirers are opting to buy their target’s entire MSR position, rather than the mortgage company per se.

Big Sales Coming?

Anticipation for a significant uptick in the market began to build in January, when Wells Fargo, the nation’s largest servicer, announced that it was scaling back its mortgage operations. At that time, Wells was servicing more than $608 billion in assets, including more than $250 billion in agency MSRs, or about 8% of the entire agency market. The company said it was looking for “intelligent and economic ways to reduce the complexity and size of the servicing book.”

The possible timing and size of these deals were hot topics at both the Mortgage Bankers Association (MBA) Servicing Conference and the Structure Finance Association’s SF Vegas event earlier this year. However, the flow of new MSR deals remained relatively flat and even slowed a bit in the aftermath of the regional bank failures.

In mid-April, several trade publications reported that Wells had sold more than $50 billion in servicing in a deal that is expected to close later this year. Since then, Inside Mortgage Finance has followed up with reports that Mr. Cooper was the buyer in the $57 billion Wells’ deal while taking on an additional $37 billion from Rushmore and a $40 billion SPS portfolio. The publication also noted that smaller deals valued around $7 billion from other sources might be coming to market soon.

Getting the Collateral Ready for a “Close-Up”

As the leader in document research and processing, NTC works with buyers and sellers in MSR transactions. In fact, we frequently have relationships with clients on both sides of the same transaction; this often creates significant advantages for the participants. As a best practice, sellers (or in some cases their subservicers) often engage NTC to review the collateral as part of a major MSR sale. What the seller needs to know is the state of the non-MERS registered loans in a particular tranche. How clean is the chain of assignment and are there any missing or defective documents (mortgages, assignments, lender title policies) that need to be remediated, retrieved or replaced?

Whether NTC is receiving the physical collateral at its secure, state-of-the-art vault facility or ingesting large collateral image files (BLOBS), NTC will often review each file to identify critical deficiencies that may need to be addressed to avoid downstream headache and cost for the buyer, or worse, a situation where the seller must buy back the loan.

NTC then typically will prepare assignment verification reports (AVRs) for each loan file from information it obtains directly from public county records to identify any mortgage or assignment chain defects that would not be able to be determined by just reviewing a potentially incomplete collateral file. Depending on the size of the tranche and the makeup of the portfolio, these reviews, and subsequent remediation, can take weeks or months. In the case of very large portfolios, prudent sellers have been known to begin the process as much as 2 years ahead of potential sales. Small pools can often be well taken care of in house with an acceptable process by the seller; however, NTC has a history of being able to meet time frame demands on many large trades, ranging from 10,000 to 300,000 loans, over the years.

Typically, the seller is responsible for the logistics and the cost of preparing transfer documents and the assignment. However, some buyers negotiate the “control” of the process, and the selection of the vendor that will handle it as part of their purchase agreement.

An important factor in selecting a partner like NTC, one that has the experience and the scale to efficiently handle these reviews, is signing authority. At some point, thousands of assignments of mortgage and/or allonges may need to be executed and notarized in order to be recorded at the county. If the partner doesn’t have signing authority or power of attorney, this can delay a transaction or require the seller to be involved in the execution process. In many cases, a corporate resolution is required to grant this authority, which may mean waiting for the next quarterly board of directors meeting and then going in front of the board and explaining why this authority should be granted to a new, untried vendor.

With robust, compliant document execution controls in place, NTC is one of the most trusted providers and as a result maintains one of, if not the, largest library of signing authority documents within the mortgage capital markets space. So, waiting for board approval is rarely an issue for our clients.

Knowing cost is always a factor, NTC has successfully maintained some of the most competitive pricing for services of this nature, which does not sacrifice quality. Further, NTC has proven time and time again that the dollar value gained with such a thorough service far outweighs the cost. Value increases are seen most obviously in sale price and less tangibly with the reduced downstream expenses that will occur if not addressed, as a whole, upfront.

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