What’s Driving the MSR and RMBS Markets?

The rising mortgage rates are driving a strong demand for Mortgage Servicing Rights (MSRs) even as the issuance of reverse mortgage-backed securities (RMBS) remains healthy, according to the Kroll Bond Rating Agency (KBRA).

In an update highlighting the performance of companies active in the U.S. residential mortgage industry, KBRA revealed that during the second quarter around $97.1 billion in UPB of bulk MSR sales were completed bringing the volumes in the first half of the year close to around $193.3 billion. This high demand, the report said, continued to support valuations and market liquidity leading banks to provide more credit secured by MSRs.

Pointing to Ginnie Mae's recent announcement of a three year strategic plan to realign its counterparty risk management framework that will allow additional financing for MSRs, the report said: " In addition to banks, GSEs are slowly building support for MSRs as a financeable asset, an effort that will benefit non-bank financial institutions who lack deposit funding."

Apart from rising GSE interest in MSRs, the report also indicated capital relief for MSRs thanks to a simplification to capital rules released by the Federal Deposit Insurance Corporation (FDIC) during its semiannual regulatory agenda. The FDIC proposal raises the cap on MSRs allowable in Tier 1 capital from 10 percent to 25 percent and increases the risk weighting exposure for these rights above the cap from 100 percent to 250 percent. The report said that if passed, the proposal would remove a significant capital constraint on FDIC-supervised small banks that specialize in mortgage servicing and "make it less likely that a small bank would exit or reduce its activity in that space."

Looking at RMBS, the report indicated that despite a slight pullback from the highs of the second quarter, the issuance of RMBS ended the third quarter as the highest post-crisis issuance quarter behind Q2. The data also pointed to an increased risk privatization even though a very small portion of this market, dominated by the GSEs, has non-agency RMBS players. The total issuance in prime, nonprime and CRT sectors was projected to end the third quarter at just above $10.2 billion, the report indicated. "Through mid-September 2018, $33.4 billion has been issued, surpassing the FY 2017 post-crisis record of $29.2 billion. 3Q18 included new issuers in the Non-Prime or Expanded Prime sectors."

The KBRA report, which also looked at the overall housing market revealed that despite some softness, the economic environment remained strong for housing. Giving an analysis of individual performances of bank and nonbank mortgage lenders and servicers, KBRA said that while Citi had exited the servicing business thanks to the competitive environment, Bank of America saw a decrease in its mortgage banking revenue over the last year and due to "limited reporting disclosures, the company's mortgage strategy is somewhat a mystery."

Overall though, the report said that the industry remained highly fragmented with many smaller, independent operators enjoying robust refi volumes and high margins over the last several years. Giving a comparison, KBRA said that in 2013, the top five producers represented 48 percent of the market versus 28 percent today. "Clearly, the industry has already transitioned to a higher-rate, purchased-focused market driving consolidation and some corporate restructuring," the report indicated. "In October, JPM announced it is laying off 400 home-lending jobs (JPM cut 7,900 in 2014) and WFC cut 650 mortgage jobs in August. Other high-profile companies announcing layoffs include USAA, Guaranteed Rate, and Movement Mortgage."

Click here for a more detailed profile of the lenders and servicers covered in the KBRA report.