It's no secret that there are signs of life in the "flow" servicing market, but will these green shoots of a revival turn brown?

It's hard to say, but servicing investors and brokers alike are now saying that for the flow MSR market to move forward uncertainties surrounding representations and warranties need to be cleared up. And when you talk about the current market for receivables that ultimately leads back to Fannie Mae and Freddie Mac.

The problem boils down to this: there are investors out there ready, willing and able to engage in flow servicing transactions where one or more lenders upstreams new servicing rights on a monthly basis. Prior to the housing meltdown, the flow business was fairly stable and quite profitable for sellers and the investment bankers in the middle of these transactions.

But then the subprime meltdown ensued with Wall Street securitizers first demanding buybacks, and then Fannie Mae and Freddie Mac jumping on board the repurchase train, and that was all she wrote.

Of course, it's generally agreed that any loan written since late 2009 is considered to be almost risk-free of going into default. Still, the GSEs will be GSEs, and the fear alone of a buyback request has dampened the flow MSR market. Servicing-released premiums are near all-time lows, and everyone knows. Buyers of MSRs are happy because they can purchase pristine receivables at two times the servicing fee.

"At some point buyers have to get away from that mentality," said David Akre, a principal in Whole Loan Capital LLC, New York. Akre recently put together a group of lenders looking to sell $4.8 billion of flow MSRs into the secondary market.

Akre said he's received strong interest in his package, and hopes to complete a transaction by summer's end though he's loath to talk about hard deadlines.

He and others noted that Fannie Mae and Freddie Mac have granted "bifurcation" status to a handful of servicers who are willing to buy flow MSRs, granting this select group a safe harbor from buybacks should the underlying loans go south.

Sources say Fannie has granted bifurcation to roughly 20 firms. So, if the 20 are immune from repurchases, who's on the hook? Answer: The firm that sells the mortgages servicing-released. As one investment banker put it: "No [MSR] buyer will take on the repurchase counterparty risk."

And just how does a servicer get on the bifurcation list? Sources say they must have at least $15 million in capital and ask for Fannie's approval. Servicing advisors say Wells Fargo and JPMorgan Chase are both on the Fannie list. Recent MSR buyers like Nationstar are not.

Wells and JPM are also the largest correspondent mortgage purchasers outside of the GSEs but neither is in the market for bulk MSRs. The general hope among servicing brokers is that bifurcation will allow for more flow deals to occur. One broker told me that he believes that bifurcation "is ready to burst—and I mean in a good way."

In other words, if investor/servicers are off the hook on buybacks they, in theory, will be more willing to pay up for flow MSRs. This would make sellers and servicing advisory firms quite happy.

But things rarely work out so conveniently for all involved. As Akre noted, "This can be a tricky business." His hope is that buyers will end what he calls the "disconnect" between legacy MSRs and new product.

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