Consumer demand for mortgages is down, and lenders are trying innovative marketing tactics to raise their slumping production volumes. On top of that challenge, several wholesale or correspondent buyers are engaging in a price war that has caused several lenders to purchase loans at negative margins.
“You don’t need to have an Ivy League diploma to understand that originating or buying loans at a loss is not a viable long-term plan,” said Matt Maurer, Managing Director on the Transaction Advisoryteam at MountainView Financial Solutions, a Situs company. Maurer will be digging deeper into these pricing dynamics as a panelist in an Execution Strategies session today in Houston at the Southern Secondary Market Conference of the Texas Mortgage Bankers Association.
“For high loan-level price adjustment GSE loans, the larger originators are taking advantage of whole loan outlets that provide them with better-than-agency execution. However, taking advantage of LLPA arbitrage opportunities, selling spec pools and booking aggressive MSR book values will not get you to the execution levels currently in the market.”
As a result of aggressive pricing in the correspondent and wholesale channels, holders of the MSR asset want to book the asset more aggressively. However, according to Maurer, this tactic is ill-advised, as neither MSR market execution levels nor long-term expected cash flows warrant this approach.
“If an aggregator is willing, in essence, to pay you north of a six multiple on your MSRs, we recommend that you sell,” Maurer continued. “For our model to get to a six multiple – or 150 basis points in price – on a 25 basis-point strip, we have to significantly lower prepayment speeds and cost.”
These pricing dynamics spread across product types, from conventional mortgages to loans with minor issues (scratch and dent) to jumbo and non-QM (Qualified Mortgage). Maurer’s panel will discuss new and innovative execution strategies for each product type – lesser-known and sometimes overlooked ways for sellers to be more profitable.
While the conference will have a separate session focused on servicing and MSRs, Maurer said several industry consultants are still recommending that originators who want to sell servicing on newly originated Fannie Mae, Freddie Mac and Ginnie Mae loans should generally sell using the common and traditional co-issue approach. However, it would be more profitable for originators with capital to hold the MSRs and service the loans for a few months and then sell the loans on a bulk basis, according to Maurer.
“In looking at aggregating and then later selling in bulk compared to selling co-issue, if you take all revenue and all costs into consideration, you can get another eight to 10 basis points in execution by aggregating and selling in bulk,” said Maurer. “That’s held true for years, but the question is whether you have the capital to take advantage of this opportunity.
“When you’re selling to the agencies, there’s an implied servicing-released premium that you are forgoing, so if you were to keep the servicing, there’s a cost to hold that servicing,” explained Maurer. “So let’s say the servicing is worth 125 basis points and you have 20 basis points of margin in there. You’re then going to be out of pocket 105 basis points for retaining that servicing, and you don’t get that 125 basis points of revenue on the loans until you sell the servicing. However, if you sell co-issue, your all-in pricing may be only 115 basis points. In this scenario, you can either make 20 basis points today, or you can aggregate and sell in bulk and make 30 basis points, an extra 10 basis points. In order to do this, you need to have the capital to retain that servicing for four, five or six months, but it’s a great investment on that capital.”
When asked about other product types his panel will likely discuss, Maurer said there’s more appetite for non-QM loans, especially from banks that are seeking loans in the so-called Prime Elite category. Maurer said this category is for the highest-quality and lowest-rate loans.
“Originators and aggregators of this product are finding better execution selling to banks than by securitizing the loans,” said Maurer. “Securitization execution for non-QM product in general tends to be better on pools that are higher coupon and have a little more risk. Securitization generally wins out for non-QM loans, but for Prime Elite loans that are 5.5% or lower coupon, the best execution for that is with banks looking to portfolio the loans.”
Maurer’s panel is part of a two-day agenda at the annual conference, which seeks to address the top challenges facing secondary marketing teams at mortgage originators.