When Ohio Savings Bank put $5.4 billion of mortgage servicing rights up for sale last week, it was the first major offering of such a portfolio in almost six months.
The Cleveland thrift’s move is perhaps the clearest indication yet that the market does not expect the recent jump in interest rates — and the corresponding drop-off in refinancing volume — to reverse anytime soon. While tough on originators, that’s a long-awaited piece of good news in the servicing market.
Apparently Flagstar Bancorp Inc. is also convinced that the market has reached a turning point. Brokers say the Bloomfield Hills, Mich., thrift pulled a $5.3 billion package of servicing off the market in February when it could not find bids to its liking, but is trying again now.
“Servicing values tend to be countercyclical,” Jess Lederman, a senior vice president at Ohio Savings, said in an interview Thursday. “We had been holding off on selling” for the past year as mortgage rates dropped to historic lows. But those rates have risen 100 basis points in the last month, and demand for servicing has increased.
“This is the first environment we’ve seen since the first quarter of 2002” in which mortgage rates have risen steadily and by about 100 basis points, said Dean Demerit, an executive vice president at Phoenix Capital, a servicing brokerage in Denver that is handling the Ohio Savings auction.
Servicers that would have been wary of picking up servicing amid falling rates — for fear of losing some of the purchased assets as homeowners refinanced — are more eager to buy now. They are particularly keen on buying servicing rights for loans made at lower rates, anticipating that the assets will stay on their books longer if rates have really started rising for good.
“When we talk to potential buyers, people in the marketplace, we’re not hearing as much negativity about interest rates as we’ve heard in the past,” Mr. Demerit said. “If rates continue to rise or even remain stable, I think we’ll have a fairly active third and fourth quarter in the servicing market.”
Phoenix will accept bids for Ohio Savings’ package on Thursday, and executives at the brokerage said they are talking with several smaller banks about portfolios in the billion-dollar range.
Phoenix executives said they have no idea what price the Ohio Savings package will fetch, as there have been few deals so far this year. (Generally, the servicing on a portfolio in the billion-dollar range would be worth an eight-figure sum.)
Two-thirds of the package are bread-and-butter Fannie Mae and Freddie Mac 30-year fixed-rate loans, with an average interest rate of 5.9%; the other third is made up of 15-year fixed-rate conventional loans, with a 5.15% average rate.
“The seller, the buyer, and the market are going to learn a lot about what is a fair price,” Phoenix principal Bret Schaeffer said in an interview Thursday. “This is the first meaningful transaction in a reasonable market environment, so we all have a lot to learn about where the market is going to.”
Three servicing broker sources who requested anonymity said Flagstar recently put up for sale a $4 billion package, most of which it had tried to sell earlier in the year but pulled when bids fell short of its expectations. The sources said its broker is Countrywide Servicing Exchange, a unit of Countrywide Financial Corp. of Calabasas, Calif.
Attempts to reach Flagstar officials for comment were unsuccessful, and Countrywide would not comment.
However, according to a Securities & Exchange Commission filing, Flagstar did sell a $4.9 billion bulk servicing package during the first quarter.
An investment banker familiar with the servicing market said that since few servicing deals have been made recently, it is hard to estimate what price Ohio Savings will fetch.
But he said that once the Ohio Savings deal is concluded and a few more servicing deals are floated and priced, observers will get a better handle on the going rate for servicing.
Nonetheless, Mr. Demerit said that since May 31, when mortgage rates hit their 2003 low, “we have seen servicing values pick up tremendously. A 100-basis-point rise in rates has increased the value of servicing portfolios from 25% to almost 50%, depending on which kind of loans are involved.”
Another servicing broker said that in light of the improved market he expected both the Flagstar and Ohio Savings offerings to be sold.
Phoenix is talking to both midsize and large purchasers about the Ohio Savings offering.
Mr. Lederman of Ohio Savings, whose servicing portfolio stands at $22 billion, said he expects big banks to be the primary bidders for the $5.4 billion offering, as it is not small.
He said that though Ohio Savings could have become a megaservicer, its relatively small territory — it has 54 branches in Ohio, Florida, and Arizona, and most of its mortgages come from brokers nationwide — limits how much it can earn from cross-selling other products to servicing clients. Ohio Savings prefers to sell servicing rights to larger competitors that find servicing a more attractive asset because of their national breadth.
