The reputed Wells Fargo mega-MSR sales, if accurate, could squeeze market liquidity, drive down prices, MSR experts say
– January 17, 2023 | HousingWire
The mortgage servicing rights (MSR) market has opened 2023 with a healthy volume of capital committed to purchasing the assets along with multiple sellers primed for deals — as evidenced by the $60 billion to $65 billion in MSR portfolio offerings currently out for bid, market experts say.
That good news, however, is being overshadowed for now by what sources in the MSR market describe as a rumored record-sized series of planned MSR offerings that are reportedly being prepared by banking giant Wells Fargo, which last week officially announced plans “to reduce the size of its servicing portfolio.”
One MSR market source, who asked not to be named, said rumors around a potential Wells Fargo mega-offering or series of offerings surfaced late last year and have taken on renewed urgency with Wells Fargo’s recent public announcement.
“We had started hearing in the fourth quarter that they were going to be coming out with a $100 billion to $150 billion conventional (Fannie Mae and Freddie Mac MSR] offering, and they would follow that with $100 billion of Ginnie” [MSRs],” the market source said. “So, with the Wells Fargo announcement, the rumors are that there’s $250 billion of MSRs [based on loan volume serviced] that are going to be made available.”
Fannie and Freddie purchase and securitize conventional mortgages that meet their guidelines. Ginnie Mae guarantees mortgage-backed securities issued by lenders who originate loans through government-backed housing programs, such as the Federal Housing Administration.
Although the potential Wells Fargo MSR package offerings are still in the realm of “market rumors,” MSR experts say, those rumors are having an immediate impact on the MSR market. They say such a huge volume of MSR offerings hitting the market in a short time span would affect pricing and liquidity — at least at the top end of the market.
“While I’m unable to confirm or deny the volume that Wells plans to release to the market, what you heard seems in line with what we’re also hearing,” said Mike Carnes, managing director of the MSR valuations group at MIAC Analytics, which provides MSR advisory services. “While I don’t think it greatly impacts the liquidity of deals less than $3 billion, Wells [assuming the rumors about the bank’s planned MSR sales are accurate] may very well impact the liquidity of $10 billion and greater deals.”
Carnes said MIAC currently has three MSR packages out for bid or about to be priced that combined are valued at more than $4 billion based on the loan portfolios to be serviced. The MSR deals involve various combinations of loans backed by Fannie Mae and Freddie Mac and/or Ginnie Mae.
“If Wells saturates the market with mega offerings, they could very well pull the larger buyers out of the market for the foreseeable future,” Carnes added. “Basically, too much supply equals lower prices.”
Adding some credence to the rumors of a pending huge offering of MSR assets, industry publication Inside Mortgage Finance reported recently that its sources in the investment banking arena indicated an $85 billion portfolio of MSRs was being prepped for sale by an unspecified seller, a deal that might possibly be carved into two packages. The publication also reported that speculation was mounting that the seller might be Wells Fargo.
Carnes and other MSR advisory-firm experts say the start of the year is when MSR buyers have new budgets and are flush with capital. Those buyers can include banks, independent mortgage banks and private investors, some backed by private equity firms.
“If one or two firms step up and buy it all [any large Wells Fargo MSR offerings], it has very little impact,” Carnes said. “If it gets spread out over a period of years, with multiple large offerings and multiple buyers, it could make it difficult for anyone else wanting to sell in larger quantities.
“To safeguard against possible market saturation, look for sellers to accelerate the sale of their MSRs, hoping to get in front of the market while buyers still have the budgets and bandwidth to buy.”
Tom Piercy, managing director of Incenter Mortgage Advisors, another big player in the MSR space, added that this year “there is a tremendous amount of capital committed to the asset [MSRs].”
Incenter is serving as an advisor for some $17 billion in MSR portfolio offerings across three deals out for bid currently, plus another $9 billion private nonauction deal now in the works. The three MSR packages being auctioned publicly, all with bid due dates in January, include a $10.2 billion bulk offering Fannie and Freddie MSRs; a separate $2.1 billion offering of Fannie and Freddie MSRs; and a $4.8 billion jumbo-loan servicing package being offered by a bank.
In addition, Piercy said Incenter has another $25 billion or so in MSR portfolio offerings in the pipeline across two other deals. Piercy estimated that as of early January, across the entire MSR market, and including “his peers in the industry,” there was about “$60 billion to $65 billion in play in the marketplace publicly.”
“Normally, at the beginning of the year, you’ve got all new budgets [for MSR buyers], so you’ve got a lot of capital commitment and people ready to buy,” Piercy said. “So, that’s why you push hard to get those deals out.
“Now, there’s all these rumors tied to [Wells Fargo] and an abundance of MSR being released.”
Piercy said those rumors, whether they turn out to be true or not, are already having a “major impact” on the market.
“This week there’s been a storm of calls and texts, and [I’m] talking with buyers and getting their perspective on the marketplace right now,” Piercy said. “I’ve had so many comments with regard to this [Wells Fargo rumor] and whether it’s going to cause all the capital to be used up, and MSR values will drop.
“There’s a lot of [buyers that] feel there’s going to be a buying opportunity, so I’m struggling with this because based on the volume and what is going to be offered, there’s less than a handful of [buyers] who could actually look at those large deals.”
As a result of the limited buyer pool for mega-MSR deals — potentially involving a total of up to $250 billion in MSRs portfolio offerings — Piercy said he it’s not clear how the market would be impacted ultimately, explaining that the devil is always in the details. He said if Wells Fargo did move forward with a couple huge MSR offerings, “there’s this whole other market that’s going to continue in the $250 million to as much as $20 billion range, and there’s different buyers that operate within that category.”
“It’s too early to say what the sell side will do [if the Wells Fargo MSR-sale rumors turn out to be true],” Piercy said. “Every MSR trade is unique, not only the asset itself is unique, but the reason for selling is unique, and so that would impact as to what trades may go off versus which ones are pulled back.”
“By next week, we may know something different. But what we’re dealing with now is … a problem around perceived value, given the rumors of sizable volume coming to market as a result of recent announcements [related to Wells Fargo]. So, perception is reality right now.”
Rob Nunziata, co-CEO of FBC Mortgage, a nonbank seller-servicer, said there are more companies selling MSRs now than in the recent past because of market conditions, with mortgage rates doubling over the past year — creating cash-flow urgencies for some lenders. “And the number of buyers really hasn’t changed that much … so you have a little bit of imbalance” he added.
Nunziata, whose mortgage company originated some $7.4 billion in loans across all business channels in 2021, said MSR assets also provide “real cash flow” if kept on the books.
“Servicing books typically will yield around 10%,” he said. “There’s a good yield that comes from the servicing book.
“So, there’s no need to sell it [MSR portfolios] because there’s an income stream, but everybody’s situation is different,” Nunziata added. “Some lenders may need to sell servicing, and if they do, right now is probably not the optimal time to do it if they can wait.”
Wells Fargo will pounce on opportunities
Wells Fargo officials did not respond to a request for comment for this story. However, Wells Fargo CEO Charlie Scharf, in the lender’s recent fourth-quarter 2022 earnings call, said the following in response to an analyst’s question about the bank’s MSR portfolio plans:
“The fact that we’ll be originating a lot less will certainly mean that over time, the MSR and the overall servicing book will come down very naturally based upon that, over a fairly long period of time. But we’ll also look for intelligent and economic ways to reduce the complexity and the size of our servicing book between now and then. And if those present themselves, we’ll certainly be interested in doing that.”
That response does not seem to rule out that Wells Fargo might entertain a mega-MSR offering, or series of smaller but still huge transactions this year. The bank recently reported a profit of $13.2 billion for 2022, down 39% from its 2021 profit of $21.6 billion.
In addition to reducing the size of its MSR portfolio, Wells Fargo, the third largest U.S. mortgage lender based on originations, announced on Jan. 10 that it will be exiting the correspondent channel, which was responsible for some 44% of the bank’s total mortgage origination volume of $14.6 billion in the fourth quarter of 2022. The bank’s Q4 mortgage origination volume was down 70% year over year, HousingWire reported last week.
Mortgage-data analytics firm Recursion reports that as of the first week of January 2023, Wells Fargo’s total MSR portfolio stood at $608.2 billion, representing about a 7.3% share of the total $8.37 trillion in MSR volume outstanding as of that date — including Ginnie Mae, Fannie Mae and Freddie Mac MSRs.
Broken down by MSR channel, the lender’s MSRs portfolio linked to Fannie Mae-backed loans total $269.4 billion as of the same date, or about and an 8% market share. Its MSR portfolio of Freddie Mac-backed loans totaled $226.5 billion, or a 7.9% market share.
Wells Fargo’s Ginnie Mae MSR portfolio stood at $112.3 billion as of early January, representing a 5.3% market share, according to Recursion’s data. The leading all-agency MSR servicers as of the first week of January, according to Recursion, include Wells Fargo at No. 1, followed by Pennymac, J.P. Morgan Chase, Rocket Mortgage, Lakeview Loan Servicing, Freedom Mortgage, Mr. Cooper, Rithm Capital (formerly New Residential), and United Wholesale Mortgage.
Piercy said whether the rumors related to Wells Fargo and potential mega-MSR offerings are true or not will ultimately play out and that will “work its way through” the market.
“MSRs have a lot of significant interest as an alternative investment,” he added. “I was extremely bullish with regard to liquidity coming into this year.
“And I’m ultimately feeling as if we should remain bullish, if we can get through this initial reaction to what may happen in the marketplace. I think the laws of economics will ultimately settle in here as soon as there’s greater certainty.”