The interest rate environment in recent years has kept the market for mortgage servicing rights moribund, with motivated sellers far outnumbering buyers and the few willing to bid disinclined to extend themselves.
But conditions may be changing. Certainly with rates leveling off - and many in the market expecting them to head higher eventually - some sellers are doing extensive testing. One example is Irwin Mortgage Corp., which is auctioning servicing rights not on existing loans but on $4.8 billion to $7.2 billion of future production.
In an interview, Irwin Mortgage chief financial officer Tim Murphy would not specify why his company made this decision.
He did say that servicing trades have picked up recently because "there are a lot of companies over the past year who have added a great deal of servicing to their portfolio and it is a capital-intensive asset. For that reason you're seeing people do this for balance sheet management or capital management."
Bret Schaffer, a principal at Phoenix Capital, a servicing advisory firm in Denver that is not involved in the Irwin auction, agreed with Mr. Murphy's assessment.
"Most of the companies other than your very largest top 10 to top 20 players have not had a company profile of being a servicing accumulator," Mr. Schaffer said. "They would prefer not to hold the risk and tie up their capital" in too much servicing.
According to a Securities and Exchange Commission filing, Irwin's servicing portfolio grew 70% this year through Sept. 30, to $28.5 billion.
Another motivation for firms to sell, Mr. Murphy said, is that pricing has improved as rates have steadied.
He said that Irwin Mortgage, an Indianapolis company owned by Irwin Financial Corp. of Columbus, Ind., had not been an active seller of servicing for the past two years, because falling mortgage rates made prices unattractive.
Mr. Schaffer said that "pricing is certainly firming on the Street and the dynamics for demand are changing."
He said that in the past 30 days his company has brokered "a couple of sizeable flow deals." These were "a bit larger than the Irwin deal" but auctioned privately, he said.
Bids for Irwin's servicing package were due Thursday, but Mr. Murphy said the deal "is not done yet." Cohane Rafferty, a White Plains, N.Y., unit of Lehman Brothers, is handling the sale.
The offering is a "flow" package, meaning that the servicing rights are to be transferred the same time the loans are sold into the secondary market.
The big purchasers of servicing generally would rather buy whole loans than do pure servicing trades, because they get tax and float benefits "and can leverage their guarantee fee advantages" with Fannie Mae and Freddie Mac, said George Christo, an executive vice president at Prestwick Mortgage Group, a servicing brokerage in Alexandria, Va.
Often the buyers will pay a higher premium for servicing when it its part of a whole-loan trade than they would for servicing alone, Mr. Christo said.
On the other hand, larger, sophisticated sellers like Irwin can themselves command favorable pricing for their loans from Fannie and Freddie, he said. For them, it is an apples-and-oranges comparison between the servicing premium on a whole loan and that on a pure servicing trade.
Even with ostensibly lower prices for their servicing, they get the best execution by selling the servicing to bigger lenders and the loans to the government-sponsored enterprises.
There are also operational advantages to selling the loans directly to the GSEs, Mr. Christo said. It has traditionally been easier to transmit loan files electronically to Fannie or Freddie than to one of the big servicers.
However, in recent months the bigger servicers have begun to address this problem by streamlining their delivery systems, he said.
And buyers may begin to bid more aggressively for servicing rights alone if rates continue to rise and "production gets really scared," Mr. Christo said.
"Once it gets to the point where the need for units overrides" the preference for whole loan purchases, "that's when pure servicing premiums will go up," he said.
"They have gone up since the summer," when rates spiked, but not as much as potential sellers expected.
Marc Hochstein contributed to this report.
