The Buzz Continues for Mortgage Servicing Rights

As we noted a few months ago, the secondary market for Mortgage Servicing Rights or “MSRs” continues to be hot.

Sellers, usually banks, are not waiting for new regulatory capital rules to kick in.  Several have already drawn up plans for when and why they may sell rights in their mortgage businesses and buyers are lining up strategies to take advantage of what many perceive to be a buyer’s market; assuming of course you know what you are getting into.

Over the past several days, two large and somewhat unique trades took place.  The first involved a “re-trade” of MSRs by Ocwen Financial to a newly formed Cayman entity called Home Loan Servicing Solutions.  According to the company’s filings, Home Loan was formed for the purpose of acquiring MSRs.  The transaction represents a sale of MSRs which were originally acquired by Ocwen in connection with its purchase of a servicing business from Barclays Bank in September 2011.  One has to wonder if the portfolio will trade yet again somewhere down the road.

The other transaction involves the sale of a huge MSR portfolio by Aurora Bank, the former Lehman affiliate to Nationstar Mortgage, in  conjunction with New York-based Newcastle Investment.  The group acquired more than US$60Billion in MSRs from Aurora for a disclosed price of approximately US$480MM.

We do not doubt that the valuation process for these transactions can be tricky and the market track record remains scant.  Nevertheless, some smart folks are thinking they see some real opportunity to buy these portfolios at a sharp discount as sellers look to adjust to a new regulatory capital regimen.  Ocwen’s management made it clear that the sale is meant to free up valuable room on their balance sheet.  With the coming changes to regulatory capital rules, banks that historically been able to utilize MSRs to help meet capital ratios are now finding that MSRs just like other assets are simply just another  commodity and where there are commodities, a market is sure to follow.

Expect more, not less, of these trades as we move ahead.

About markferraris
Managing Principal Orchard Street Partners LLC

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