“Strong” is an adjective frequently used to describe the prices paid for residential mortgage servicing rights (MSRs) in recent months. Beyond the glimmer, however, is the reality that only specific slices of overall portfolios are trading very well, and a lot of MSRs out there are not going to market, according to advisory firm MountainView Financial Solutions, a Situs company.
“If there’s an overriding theme in our discussions with clients right now, it’s ‘peeling back the onion’ and showing exactly where there’s strength in pricing in the market and where you need to keep your eyes open,” said Mark Garland, Managing Director of Analytics and head of MSR valuation at MountainView. “These are not cautionary conversations per se, but it’s honest talk about how parts of a portfolio don’t meet the ‘all prices are strong’ theme.”
Many factors need to be considered before deciding what to sell in hopes of receiving high bids, according to Garland. He said the firm has been seeing some portfolios that are very diverse in their range of coupons, borrower credit scores and consistency of cash flows, while the real demand is for pristine portions of portfolios.
“Prospective sellers are often combining a wide array of product and risk, which in reality mirrors the holdings of most portfolios, but that’s not what’s actually selling today … that’s not what’s in demand,” explained Garland. “When you have 30-40% of a portfolio that doesn’t match up with the pristine/clean MSRs and force someone to entertain the idea of buying that entire portfolio, prices become very different, and you can be very disappointed.”
“The reality is that today’s buyers are sophisticated in modeling and understanding risk,” he added. “As a seller in a price negotiation, you’re re not going to get them to bump up their bid on MSRs that have significant risk. On pristine MSRs, you might move them to sharpen their pencil, but they’re not going to get fooled by risk.”
Garland emphasized that this means prospective sellers really need to know exactly what is selling and what isn’t. They need this information to make smart sale selections and have their portfolios priced right before they go to market.
“You have a much better chance of closing if you know ahead of time where the bids are likely going to come in at,” he said. “That way you’re not facing sticker shock. You still might be disappointed upon receiving bids, but you won’t be uninformed.”
Garland is one of three presenters for MountainView’s MSR Asset Monthly Snapshot webinars, where the firm discusses the interest rate environment, MSR pricing levels, MSR market activity and MSR risk management for the previous month. In the next webinar on Wednesday, Aug. 8 at 3 p.m. EDT, the presenters will focus on exactly where the strength in pricing is right now.