Buried Treasure

According to popular conception, and maybe lending folklore, folks are burying their stolen home equity fortunes in remote places (like NYSE:NVDA) intending to return to them later, often with the use of a treasure map!

The Bigger Picture

We are always living history, any moment is a shift in history, and some shifts are more historical and significant than others.

The Covid-19 Pandemic (C19P) altered the genetic DNA of lending in many ways, not the least of which is our rekindled interest in loan servicing.  Prior to C19P, our usual modus operandi was to originate and sell the servicing asset, and the client relationship.  Loans had an average prepayment speed of 18-24 months, which means we refinanced our borrowers at lightning speed.  Post C19P, our focus has begun to shift back to originate and retain the MSR (Mortgage Servicing Right), and the client relationship.  

Several fundamentals are causing this shift. 

First, the bulk of American’s who own homes have a seismic amount of home equity.  According to the February 2024 ICE Mortgage Monitor report, the average homeowner currently has about $299,000 in home equity, about $193,000 which is tappable home equity. 

 Second, according to Wells Fargo’s Residential Mortgage Monthly, mortgage refinancing opportunities continue to shrink from 2020’s all-time highs.  As interest rates remain high, the refinance incentive continues to drop, while the value of the loan servicing continues to rise.

Third, according to the MBA’s most recent Mortgage Finance Forecast, the refinance share of new originations will continue to remain at or near all-time lows (23-27%).

 Four, new originations for mortgage lenders will not return to 2021-2022 levels even if interest rates fall 200 basis points over the next three years.

Five, there seems to be an insatiable market for MSR’s and owning the servicing asset.  By definition, an MSR is a contractual right to receive 25 basis points as compensation for servicing a mortgage loan that has been securitized.  U.S. conventional mortgage loans are often securitized and sold to fixed income investors and backed by the GSEs who guarantee principal and interest payments to buyers of Mortgage-Backed Securities (MBS).  An MSR is a priority payment in the cash flow waterfall.       

Six, the primary risk of MSR is prepayments.  Today, nearly 9 in 10 U.S. Mortgage Holders have a rate below 6 % (Source: FHFA, National Mortgage Database (NMDB).  Therefore, prepayments plus natural principal paydowns drive down the balance of mortgages backing MSRs.  Slow prepayment speeds increase the value of the asset, refinancing the asset increases speeds and decreases the value.  That means, originators hold the key to prepay speeds and the value of the MSR.

Seven, in 2023 originators continued to sell large quantities of MSR.  Bank and non-bank originators continue to struggle with profitability amidst a challenging environment of low origination volume and operating losses.

Eight, newly promulgated bank capital standards (risk weighing Basel III) may prompt additional bank MSR sales and force small to mid-size banks out of warehousing, whole loan buying and servicing markets.

Nine, 8 of the top 10 originators were large sellers of MSR in 2023 (UWM, PennyMac, Rocket, AmeriHome, NewRez, GRATE, Fairway, Cross Country)- Source: Wells Fargo’s Residential Mortgage Monthly.

Ten, if a mortgage originator sells their loan servicing, they are contractually precluded from contacting and refinancing that client for a period.  To add insult to injury, opt-in/opt out of credit solicitations are a compliance nightmare, and if trigger leads are outlawed access to our past client will be difficult. 

Retention – an historical shift in this new era of mortgage lending 

It’s time once again for mortgage bankers to retain their loan servicing, the MSR asset, and the customer relationship.  This simple shift in perspective will change the course of your business and help you build a sustainable, asset.

It is the most effective way to retain homeowners.  You will be able to predict prepayment and deliver personalized, compliant, offers that convert by making the tough decisions of homeownership simple and intuitive.  And, you can finally become a lifetime home equity advisor, generating value with your client through an all-in-one hub for home finances to power your retention and loyalty strategies. 

Close more loans from existing customers. 

Expand into new products.  Home equity 2nds, insurance, warranties. 

Attract and retain your best LO’s.  Give them back their clients and more qualified leads that are ready to transact. 

Almost as good as NVIDIA?