Mortgage servicing rights trade at highest multiples in decades

Mortgage servicing rights (MSRs) are currently trading at some of the highest multiples seen in decades, with pristine conventional MSRs approaching 7 times their value, according to HousingWire.

This surge in demand is driven by lenders and investors who are balancing factors such as retention, liquidity, recapture, and regulatory requirements like Basel III. Chicago-based Rate has notably shifted its servicing strategy to retain its MSRs instead of selling them, accumulating over $50 billion in MSR retention over the past year.

The trend toward holding MSRs reflects a broader industry movement, as mortgage lenders aim to recapture borrowers when interest rates eventually decline. John Sullivan of Milliman noted increased discussions with clients about portfolio retention unless liquidity constraints arise, and about monetizing portfolios when not hedging.

Interest in MSRs is not limited to independent mortgage banks; depository institutions are also becoming more active in this space. Larry Goldstone of BSI Financial Services highlighted that banks, traditionally less effective at borrower recapture, are expected to increase participation due to changes in Basel capital rules, viewing MSRs as part of broader customer acquisition and cross-selling strategies.

Strategic investors are also expanding their MSR portfolios. Rob Williams of Grander Investment Management described MSRs as a "spectacular asset" capable of delivering double-digit returns, allowing for a more tactical and patient investment approach.

Overall, the MSR market is experiencing robust activity from various types of investors, reflecting its growing importance in mortgage finance and consumer banking strategies.