With fears mounting that the government may soon radically alter servicing compensation, a Wall Street firm is making the rounds offering a "sale leaseback" deal to some of the nation's largest holders of mortgage servicing rights.
According to secondary market advisers familiar with the concept, a transaction would work like this: The MSR owner would sell a large portion of its portfolio, cashing out of the asset but continuing to be the subservicer.
Austin Tilghman, president of United Capital Markets, said he had no firsthand knowledge of any such deal, but, "It makes sense given what's going on. The pricing will be very important."
At this point, it's unclear which Street firm is talking up the deal, or which of the nation's megaservicers have been approached.
A handful of servicing advisers talked about the concept, while requesting their names not be used. All cautioned that the sale leaseback talk is preliminary but said three developments are spurring it: the Federal Housing Finance Agency forcing Fannie Mae and Freddie Mac to restructure servicing compensation, fears that a pending legal settlement between state attorneys general and top-ranked servicers will push up operating costs and Basel III capital rules that will make MSRs less valuable as assets.
Fannie and Freddie currently pay a minimum of 25 basis points to servicers. An early draft of a Fannie proposal has that fee falling to just three basis points. But advisers following the servicing fee issue say Freddie Mac isn't on the same page as Fannie Mae.
"Freddie's position is that they want to reduce the servicing fee a little bit," said a source who has worked with Freddie. "There's different views on this over there and staffers are taking a cautious approach."
Others contend that Fannie may float the idea of paying servicers a flat fee to service performing mortgages and something more to handle delinquent loans. Already this is being criticized by some who say it gives no incentive to keep loans current but enriches servicers with higher balances of nonperforming mortgages. "Why should I keep the loan current when I get paid more for letting it go into arrears and then correcting it?" an official asked.
As for sale leasebacks, any potential transaction would be driven by price. Currently MSR values are weak thanks to near-record delinquencies, though servicing rights created over the past two years are considered "golden" because of extremely tight underwriting guidelines.
A broker who heard the story about the Street firm shopping the concept asked: "How do you achieve 'sales treatment' on such a transaction, especially if the buyer isn't really taking over the servicing chore? You have to be cautious to make sure this doesn't look like a financing." This broker added that some of the pricing being mentioned on a sale leaseback sounds high. "I even heard the figure of 'five times' the servicing fee multiple. But I don't see that, especially with new product only getting four times, at best."