WASHINGTON — With an improving economy, higher-quality originations and declining delinquencies, the market for mortgage servicing rights is catching fire.
Servicing rights are high-yielding assets, making them attractive investments for hedge funds, real estate investment trusts and banks. Auditors at the Government Accountability Office recently reported that "regional and midsized banks are showing renewed interest in buying MSRs."
That includes SunTrust, which has been a selective buyer of MSRs for several years, but has dramatically increased its purchases in recent months.
"We purchased $8 billion in MSRs in the first quarter," Aleem Gillani, SunTrust's chief financial officer, said during an April 22 earnings conference call.
That was in the ballpark of the Atlanta-based bank's entire MSR purchases in 2015, which totaled $10.3 billion and 2014, when it bought $10.9 billion.
"This is consistent with our strategy to grow our servicing portfolio as we view performing servicing as a core competency and a solid return on investment ROE business," Gillani said.
As of March 31, 2016, SunTrust's MSR portfolio had $121.3 billion in unpaid principal balance of loans serviced for others. (SunTrust declined to be interviewed for this story.)
Flagstar Bancorp, meanwhile, is an active seller of mortgage servicing rights as part of a strategy to meet its Basel III capital requirements and grow its subservicing business.
"Our goal is to reach the fully phased-in MSR limit by the end of the first quarter of 2018 through efficient bulk and flow sale transactions," Lee Smith, the bank's executive vice president and chief operating officer, said in a recent interview.
Flagstar is seeing more investor interest in MSRs and nonbank servicers are selling a lot product this year. "They want to free up capital and generate liquidity," he said.
Flagstar sold $5.1 billion in MSRs involving 23,000 residential loans during the first quarter. The Troy, Mich., bank also originated $6.4 billion in single-family loans during that time.
"Because we are constantly creating MSRs through our mortgage origination business, we are regular sellers of MSRs because we are mindful of our Basel III limit," Smith said.
But Flagstar also likes to maintain MSRs on its balance sheet because it is such a high-yielding asset.
"Everybody's yield is different," Smith said, but at Flagstar, "we will target a 6% to 8% ROA" investment returns on the MSR assets net of hedging costs.
Flagstar also likes to sell MSRs and subservice the underlying loans for the buyer.
"There are a lot of MSRs in the market at the moment" and more than last year, Smith said. But Flagstar offers a servicing platform with many services that are attractive to MSR investors. "They're looking to partner with people that can provide them with a very comprehensive operational management around that asset," Smith said. "We can do that."
The March GAO report said that many banks pulled back on servicing in the aftermath of the financial crisis and transferred delinquent MSR portfolios to nonbank servicers.
Nonbanks increased their share of the servicing market to 24.2% in 2015 from 6.8% on 2012. As of the second quarter of 2015, banks serviced 75.8% of mortgages.
However, nonbanks service 35% of mortgages securitized by Ginnie Mae, Fannie Mae and Freddie Mac, according to the March GAO report.
The GAO auditors reported that market participants "generally expect banks to service more mortgages in the future as the housing market continues to stabilize."