“The ability of smaller participants to compete in the marketplace is limited because they simply don’t have the same cost structure,” Adler said. “But what we see is a different world in which the large participants who have built these infrastructures have very low marginal costs and are willing to use that infrastructure in a low-capital way and work together as asset managers.”
This trend was illustrated in October Rocket mortgage announced a deal with Annaly to handle maintenance and recapture activities for a portion of its MSRs. Annaly has built a platform of 608,000 loans, representing $192 billion in unpaid principal (UPB) and $2.8 billion in market value as of mid-2024.
M&As and bulk sales
According to Jenn Fuller, general manager of Houlihan Lokey‘s financial services group.
A notable example occurred in October 2023, when the Minnesota-based real estate investment trust Two ports ended up in the service industry through an acquisition RoundPoint Mortgage Servicing LLC.
In another major transaction announced in August 2024, the Swiss banking giant UBS Group AG sold Credit Suisse‘s mortgage service, Select Portfolio Service (SPS). The buyers – a consortium led by Sixth Street of Davidson Kempner Capital Management as co-investors – gained control over the economy and the servicing performance of their loan portfolios, a move that Fuller characterized as a strategic advantage.
In addition to platform acquisitions, which are also related to some companies exiting the business, the services market has seen robust bulk sales activity. According to Fuller, these are mainly from independent building societies (IMBs) looking to strengthen liquidity amid challenging conditions.
“I would say the big driver behind a lot of these transactions has simply been the service charge. If you can’t meet that bar in terms of internal efficiency, you should leave the company. It is that simple, and I expect it will remain that way,” said RC Whalen, chairman of Whalen Global Advisors.
Mike Patterson, Chief Operating Officer at Freedom Mortgage Corp.said that 10 years ago “pretty much the top 10 originators were the top 10 service providers.” This meant that “the volume didn’t move as much or easily.”
‘If you look at the most recent one today Within mortgage financing data, of the top 10 originators, only four are still in service,” said Patterson. ‘There are two that produce a ton and carry out a lot of maintenance, but they have a kind of cap and they also sell everything. This has created a bulk market that has always been there, but in my opinion is much more active.”
On the seller side, the promoters emphasized liquidity as the key driver, adding the motto ‘cash is king’.
For example, Embrace home loans – a Rhode Island-based lender with 183 loan officers across 42 offices – saw its retention share of MSRs rise from 20% in 2023 to 40% in 2024, according to Preetam Purohit, the company’s head of hedging and analytics. Purohit revealed that two deals closed in early 2024 provided the liquidity needed to reinvest.
Kyle Waters, chief analytics officer at the Maryland headquarters First Home Mortgage Corp.said his company retained about 90% of its MSRs in 2023. The remaining 10% consisted of bank loans that could not be leveraged. Today, the company’s retention rate has dropped to about 40%, he added.
Banks versus non-banks
The $9 trillion MSR market is becoming increasingly concentrated, with the top 10 owners now controlling about 70% of all mortgage rights, Mr. Cooper’s King said.
“You’re definitely starting to see a lot of weight in it,” King said, adding that six of the top 10 are non-banks, which historically hasn’t been the case.
It is expected that this trend in which non-banks are becoming increasingly known will continue. This is caused by several factors, including reduced interest from banks Ginny Mae assets, stricter regulatory supervision and higher capital requirements for financial institutions.
“The regulatory side for countries like JP Morgan is tricky because it’s harder to maintain MSR on the capital side, and that’s not the case initially on the non-bank side,” said John Sim, head of securitized research products JP Morgan Securities. “Right now, the greater non-bank growth should continue, and I don’t see that changing much on our end.”
On the regulatory front, key concerns include the Basel III Endgame rule – which faces an uncertain future under the new Trump administration – and the new capital requirements imposed by Ginnie Mae. But Ginnie has recently provided some relief to MSR holders who hedge their portfolios, offering a degree of flexibility in meeting the capital rule.
In today’s MSR market, both sellers and buyers must factor recapture opportunities into their valuations. Many managers are expanding their portfolios to cross-sell products, taking advantage of opportunities such as offering home equity in a high-interest, high-equity environment. If rates eventually fall, these portfolios also position service providers to take advantage of refinancing opportunities in the future.
“We are hovering around that 7% interest rate, while not many new loans are being created and the risk of prepayment on the outstanding amount (UPB) is quite low,” said Adler, managing director of Annaly. “We used to only charge advance payments. Then we recently priced recapture.”
Adler highlighted a shift in perspective among MSR holders. “It seems like they are all not only treating MSRs as a contractual cash flow, but also seeing it as a business about managing customers. With the trust of customers, you can obtain other sources of income. That really means that you don’t always have to worry about the level of interest rates.”
