The non-bank servicers are in a position of holding great assets in a hostile regulatory environment
The non-bank servicers like Nationstar (NSM) and Ocwen (OCN) are playing a long game by accumulating mortgage servicing rights (MSRs) when they’re under pressure from banks trying to unload servicing as a way to avoid the Basel III capital hits. Plus, the lousy mortgage origination environment has encouraged small lenders to sell parts of their MSR portfolios to meet payroll. In other words, you have some motivated sellers out there, and once the selling pressure abates, the value of their MSRs should increase.
It’s important to keep in mind that the quality of MSRs that have been originated over the past six years are head and shoulders above the MSRs that were created during the bubble. Most mortgages today are absolutely pristine, with high FICOs and low LTVs. Yes, servicers of Ginnie Mae loans have to contend with the generally lower-quality FHA loans, but stillm delinquencies are a fraction of what they used to be, and as rates rise, those 3%-to-4% mortgages will never get refinanced. While this is generally bad news for investors who put these mortgages on their balance sheet—think REITs like Annaly (NLY), American Capital Agency (AGNC), and MFA Financial (MFA)—it’s great news for servicers.
The regulatory environment is impossible to predict
Unfortunately for originators and servicers, the regulatory environment is downright hostile. That said, many in Washington are starting to figure out that the way to increase lending isn’t through more and more regulation. While QM was intended to be a safe harbor to encourage more risk taking, most originators have looked at it as a line not to cross. Washington generally overreacts to a crisis and then backs off. Maybe a different administration will take a different approach. With the servicers, you need to keep tabs on the regulatory environment (watch to see if Schneiderman lets the Wells sale go through). However, you can take comfort in the fact that the assets of the servicers are extremely high-quality and the selling pressure on MSRs will be temporary.
To learn more about investing in mortgage REITs, see the Market Realist series Important releases to watch for as earnings season starts off.
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