Mortgage Servicing Strategies Are Undergoing A Major Transformation

The historically fragmented mortgage servicing space has been transformed over the past few years due to an influx of large companies and ongoing consolidation, which presents challenges for smaller players, industry experts say.  

This shift is driven primarily by active merger and acquisition (M&A) activity and bulk market transactions. Sellers of mortgage servicing rights (MSRs) aim to bolster liquidity or exit the market, while buyers pursue economies of scale, cost efficiency and sales opportunities. This trend has also witnessed a growing presence of nonbanks as depository institutions face mounting regulatory pressures.

“Large MSR owners are getting a lot of benefits through their skills and investment in technology, and they’re able to pass that through to the MSR economics, including things like retention,” said Chris King, senior vice president at Texas-based Mr. Cooper, the largest primary servicer in the U.S., which manages a $1.34 trillion portfolio. 

“You see more MSRs owned toward the top players, but having said that, what’s healthy about the market is the amount of capital that’s available.”

Mr. Cooper has been at the forefront of this consolidation, acquiring $356 billion in MSRs, advances and subservicing contracts from Flagstar Bank and $83 billion from Home Point Capital, among other deals.  

Servicing industry executives, including King, spoke on Thursday during the Information Management Network (IMN) Annual Mortgage Servicing Rights Forum in New York City.

Through these deals, companies like Mr. Cooper leverage their scale and operational efficiency to manage subservicing, recapture and loss mitigation, said Ken Adler, managing director at Annaly Capital Management. 

“The ability for smaller participants to compete in the market becomes limited because they just don’t have that same cost structure,” Adler said. “But what we’re seeing is another world where those large participants who have built those infrastructures have very low marginal costs and are willing to get in the business of using that infrastructure in a capital-light way and partnering up as asset managers.” 

This trend was exemplified in October when Rocket Mortgage announced a deal with Annaly to handle the servicing and recapturing activities for a portion of its MSRs. Annaly has built a platform with 608,000 loans, representing $192 billion in unpaid principal value (UPB) and $2.8 billion in market value as of midyear 2024.

M&As and bulk sales

Servicing sector M&As in 2023 and 2024 have primarily been driven by buyers seeking to achieve scale and integrate capabilities in-house, according to Jenn Fuller, managing director of Houlihan Lokey’s financial services group.

A notable example occurred in October 2023, when Minnesota-based real estate investment trust Two Harbors entered the servicing business by acquiring RoundPoint Mortgage Servicing LLC.

In another significant transaction announced in August 2024, Swiss banking giant UBS Group AG sold Credit Suisse’s mortgage servicing arm, Select Portfolio Servicing (SPS). The buyers — a consortium led by Sixth Street with Davidson Kempner Capital Management as a co-investor — gained control over the economics and performance of servicing on their loan books, a move that Fuller characterized as a strategic advantage.

Beyond platform acquisitions, which are also related to some companies exiting the business, the servicing market has seen robust activity in bulk sales. These are predominantly coming from independent mortgage banks (IMBs) looking to bolster liquidity amid challenging origination conditions, according to Fuller. 

“I would say the big driver of a lot of these transactions has simply been the cost of servicing. If you can’t hit that bar in terms of internal efficiency, you have to get out of the business. It’s as simple as that, and I expect that to continue,” said R.C. Whalen, chairman of Whalen Global Advisors. 

Mike Patterson, chief operating officer at Freedom Mortgage Corp., said that 10 years ago, “pretty much the top 10 originators were the top 10 servicers.” This meant that “volume didn’t move as much and as readily.”

“If you go look today at the most recent Inside Mortgage Finance data, of the top 10 originators, only four are continued holders of servicing,” Patterson said. ”There are two of them that originate a ton and do a lot of servicing, but they kind of have a cap, and they sell off everything on top of that. That has created a bulk market that’s always been there but, in my opinion, is much more active.” 

On the seller side, originators emphasized liquidity as the primary motivator, adding the motto “cash is king.” 

For instance, Embrace Home Loans — a Rhode Island-based lender with 183 loan officers across 42 branches — saw its retention share of MSRs rise from 20% in 2023 to 40% in 2024, according to Preetam Purohit, the company’s head of hedging and analytics. Purohit revealed that two deals closed early in 2024 provided the liquidity needed to reinvest.

Kyle Waters, chief analytics officer at Maryland-based First Home Mortgage Corp., said that his company retained about 90% of its MSRs in 2023. The remaining 10% consisted of bank loans that could not be leveraged. Today, the company’s retention rate has dropped to about 40%, he added. 

Banks vs. nonbanks

The $9 trillion MSR market is becoming increasingly concentrated, with the top 10 owners now holding about 70% of all mortgage servicing rights, according to King at Mr. Cooper.

“You’re definitely starting to see a lot of weight to the top of it,” King said, adding that six of the top 10 are nonbanks, which was not the case historically. 

This trend of nonbanks gaining prominence is expected to continue. It’s driven by several factors, including a diminished appetite from banks for Ginnie Mae assets, tighter regulatory scrutiny and higher capital requirements for financial institutions.

“The regulatory side for places like J.P. Morgan is tough because it’s harder to hold MSR for the capital side, and that’s not initially the case on the nonbank side,” said John Sim, head of securitized products research at J.P. Morgan Securities. “Right now, the bigger nonbank growth should continue, and I don’t see that changing much on our side.” 

On the regulatory front, key concerns include the Basel III Endgame rule — which faces an uncertain future under the incoming Trump administration — and new capital requirements imposed by Ginnie Mae. But Ginnie recently provided some relief for MSR holders that hedge their portfolios, offering a degree of flexibility in meeting the capital rule.

In today’s MSR market, both sellers and buyers must factor recapture opportunities into their valuations. Many servicers are expanding their portfolios to cross-sell products, leveraging opportunities such as home equity offerings in a high-rate, high-equity environment. Looking ahead, when interest rates eventually decline, these portfolios position servicers to capitalize on refinancing opportunities as well.

“We’re hovering around that 7% interest rate where there’s not a lot of volume of new loans being created and the prepayment risk on the outstanding (UPB) is pretty low,” said Adler, Annaly’s managing director. “It used to be that we only priced prepayments. Then, recently, we’re pricing in recapture.” 

Adler emphasized a shift in perspective among MSR holders. “They all seem to be around not just treating MSRs as a contractual cash flow but understanding it as a business about managing customers. With customer trust, you can derive other sources of revenue. That really immunizes you from needing to always worry about the level of interest rates.”