Summary:
- Severe uncertainty driven by the potential contingent liability of forbearance and the sudden disappearance of the REIT bid drove Servicing to levels not seen since the depths of the Great Recession. At the end of Q1, MSR multiples approached zero in conventional space and were negative in government space.
- Against the backdrop of what appears to be an improving economic situation and greater certainty, investor interest in mortgage servicing has been palpable. Many novice investors have inquired about the opportunity to invest in MSR.
- Target Returns for Mortgage Servicing in conventional space are in the double digits – 10-12% – while target returns in government servicing are 15-18%. Of particular interest is GNMA excess with high double digit attachment points with strong counterparties. BWFT is involved.
- Purchasing MSR has never been easier for new sources of Capital. New MSR investment shelfs coupled with technology solutions provide convenient and turnkey solutions to buy mortgage servicing in ways previously unavailable.
Just to Catch Everyone Up… All about Fear.
What a wild ride! The global COVID pandemic has been tragic for so many reasons not the least of which was the economic harm caused throughout the world. In order to address the immediate halt of commerce as a result of the ongoing pandemic, Congress enacted the CARES act in which borrowers having federally insured loans were afforded forbearance relief. Reading the text each individually and as an Industry, the Servicing community grappled with a basic question. How? For absent from the text of the Bill was the very mechanism that various non-bank (and even bank) servicers would need access to in order to raise the amount of cash required to provide PITI advancing for the potentially massive population of borrowers requesting forbearance relief. Markets swooned. Credit repriced. The Non-QM market and the REITS that trafficked in various structured product nose-dived together. The contagion spilled over to the TBA market causing a series of margin calls further damaging the REIT complex. REITS were forced to scale back and in some cases shut down. Severe uncertainty driven by the potential contingent liability of forbearance and the sudden disappearance of the REIT bid drove Servicing to levels not seen since the depths of the Great Recession. All of these changes happened very quickly driven by fear and the repricing was swift and onerous. Between Fannie and Freddie product, and adjusting for remittance differences Freddie has the definitive edge but the market still prices the MSR identically. We think this changes relatively quickly…
MSR is on the MEND…
…Things are on the mend. In conventional MSR we have seen Seller’s hitting bids at 0, 1, 1.5, 2, and now…. 2.5 while in government servicing Sellers paid -1, -.5 and 0… and now are getting paid 1.5. Are you one of the originators waiting for higher rates (MSR prices) and better tax profiles? Then you are far from alone, as a significant contingent of mortgage originators hold out for the 4.0x + of old. That’s a binary bet right now. Will the bid be there in 3 months, 6 months? That’s the play that many originators are looking to make. Risk markets have repriced higher. Stock markets and credit markets all point to the same thing: improving data and a rapid return to better times. All of these changes happened very quickly driven by euphoria, BUT what will potential repricing look like? The Fed has said rates will be low through 2022. Should rates tick higher, will originators respond to lower volumes with tighter margins (reducing primary-secondary spreads)? Against the backdrop of what appears to be an improving economic situation and greater certainty, investor interest in mortgage servicing has been palpable. Many novice investors have inquired about the opportunity to invest in MSR. Need a platform to BUY MSR? BWFT can help. Need a smarter, better way to invest in MSR? BWFT can help.
BWFT House View:
We think that there is a lot of MSR to sell if rates go higher… We think if there is a soft landing to the US economy there will be a lot of MSR to recapture. This scenario would likely entail lower rates and limited COVID related delinquency If there is a hard landing, there will be a lot of MSR to sell. For investors that hedge, we would suggest that you be equally patient (your returns will be the same if rates go higher) since the change in speeds will offset the change in price. For accounts whose business model is turning over a mortgage pipeline quickly and disposing of MSR for cash, we think that the re-pricing of risk has been quick and given the balance of risks a 3-3.5 conventional bid might not look bad on newly minted MSR given where current margins are. Why take the risk?
**** Monthly OFFERS – Side Order Book (>10 billion)
Conventional Seller Axes
- Sellers looking at Selling from 2+ to 3+ for purchase sellers
Government Sellers
- Sellers looking for 1+/2+ mult
**** Monthly BIDS – Side Order Book (>10 Billion)
Conventional Buy Axes
- Buyers looking at Buying up to 3 ¾ (BANKS)
Government Buy Axes
- Buyers looking for regional stories
- Buyers looking up to 1+/2+ mult
**** Attention Investors – CURRENT OFFERS
Target Returns in Mortgage Servicing in conventional space are in the double digits – 10-12% – while target returns in government servicing are 15-18%.
Of particular interest is GNMA excess with high double digit attachment points with strong counterparties. BWFT is involved.
Conventional Excess
- Sellers looking at 3+ mult
- Target returns in the 15+ yield range
Government Excess
- Sellers looking at 1 7/8 mult (bank sellers!)
Structured Investments:
- Purchasing MSR has never been easier for new sources of Capital. New MSR investment opportunity coupled with technology solutions provide convenient and turnkey solutions to buy mortgage servicing in ways previously unavailable.
- BWFT has Rent-a-ticket structures looking for capital
- OAS 1000+ for conventional / 1500+ government –
- Target returns in the 12% range conventional / 15% range government
- Platforms come with established relationships
- Perfected BK remote claims
- Will BUY using BWFT’s award winning LLPE technology/MSR-X
- Utilizes BWFT’s portfolio management
Originators – need a no-cost MSR bid? please email jpatel@bluewater-fintech.com
Are you a Bank looking for an MSR hedge advisor? – please email jsweeney@bluewater-fitnech.com
Are you an MSR Investor? – please email aqureshi@bluewater-fintech.com
Want to talk about MSR markets – please email tlamar@bluewater-fintech.com
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Disclosures: About Blue Water Financial Technologies Blue Water Financial Technologies, or “Blue Water” is the marketing name for a group of affiliated companies providing a range of services for which Blue Water Financial Technologies Holdings Company, LLC is the parent. All services are provided through separate agreements with each company. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. Investment advisory services are provided by Blue Water Financial Technologies, LLC which is registered with the SEC under the Investment Advisers Act of 1940. A suite of other MSR related technology-enabled services are provided by Blue Water Financial Technologies Services, LLC. Fees for these services are separate from and or in addition to any Investment advisory services provided by Blue Water Financial Technologies, LLC. For more information regarding Blue Water’s services or entities, please visit https://bluewater-fintech.com/.
This email was sent solely in conjunction with BWFT Services LLC and the Service it provides for buyers, holders or originators of mortgage servicing assets. The comments expressed are not applicable to and shall not be construed to be applicable to any public nor privately traded security. BWFT Services LLC is a Minnesota based services company.