Garnet Capital Advisors Blog

Excerpt:  Standard operating procedure in banking has long held that mortgage financing firms should also do the servicing for the mortgages in a period of rising interest rates, as a way to gain revenue to counterbalance any drops in originations.

However, although banks still service more than two-thirds of mortgages, rising compliance-related costs are causing them to abandon servicing more and more. In their place, nonbank lenders and servicers are finding it a good business.

Standard operating procedure in the banking industry has long held that mortgage financing firms should also do the servicing for the mortgages. Why? Because mortgage servicing in a rising rate environment adds revenue that can counterbalance any drops in originations. 

An increasing number of mortgage lending takes place online.

The Percentage of Bank Serviced Mortgages Is Declining…

But the U.S. is now in a period of climbing rates and that long-time wisdom may no longer hold true. Although banks are still the primary players in mortgage servicing, with 67% of the market, that figure is far below the 90% of the market banks held in the 2008-2011 period, according to the Mortgage Bankers Association.

Banks are facing increased regulation and more complexity in operations vis-à-vis servicing. Nonbank entities, on the other hand, are more tightly focused. Regulation and complexity in a viable niche may be less of an issue for them.

The financial crisis of the Great Recession triggered new compliance requirements that add to mortgage servicing costs. As a result, banks are leaving the mortgage servicing sector more and more. 

Nonbank Lenders Are Coming In

The nonbank entities are entering. They have new ways of doing business. Going forward, as a result, mortgage holders could see a sharp division between the companies that hold the mortgage servicing rights and the servicers themselves.

This new mode might be all that much easier because Millennials, who currently make up the largest group of new mortgage holders, are used to shopping online for most goods and services, including mortgages. The Ellie Mae Millennial Tracker™ reports that Millennials had 84% of all closed home mortgages as of the first of the year.

The Federal Housing Authority reports that 73% of all new mortgages are obtained online from nonbank lenders. A division between mortgage providers, mortgage servicers, and subservicers may not seem as significant as it might have to mortgage holders of older generations who went to a bricks-and-mortar lender perceived as located in their neighborhood.

Millennials often use online nonbank lenders.

The rising regulatory costs have led nonbank entities to want to raise cash, either by purchasing or obtaining financing vis-à-vis their servicing rights if production decreases fueled by rising rates erode their profits.

They are increasingly going to the capital markets for funding. Investors in these markets buy MSR portfolios and then contract with subservicers who manage the actual mortgage servicing. Many of these are nonbank companies.

New Residential Investment Corp.: An Example

Case in point: New Residential Investment Corp. It’s a real estate investment trust (REIT) developed by Fortress Investment Group. Fortress is a private equity company that also manages Nationstar Mortgage Holdings, a nonbank lender and servicer.

In early 2017, New Residential Investment Corp. signed an agreement to buy CitiMortgage’s servicing. The agreement, expected to complete in the first part of the year, means that Nationstar will get the subservicing business for CitiMortgage’s portfolio, which is estimated at $97 billion.

Both New Residential and Nationstar benefit from the deal. For the former, it means REIT-related tax benefits which make money to purchase MSRs less expensive. For the latter, it means benefits of scale for servicing that will not be eroded by any need for additional financial resources for services.

Let a Seasoned Loan Advisor Help

In a period of rising rates and increased regulation, banks can rely on Garnet to help them sell assets in a compliant way and in a transparent process that assures market value. Let the seasoned loan advisers at Garnet provide advice to lower costs and augment your balance sheet.

Click to sign up for our newsletter.