Article on page C1 of today's print edition of "The Wall Street Journal"...
...in the "Ahead of the Tape" column discusses how the recent spike in mortgage rates has reduced refinancing activity and prepayments, causing MSRs (Mortgage Servicing Rights) to become more valuable. It suggests some banks may write up the value of their MSRs. The article states: "A big part of their value (MSRs) depends on the expected speed of mortgage prepayments. Higher levels of refinancing activity make servicing rights less valuable, since it cuts off the fee stream on which they are based. When rates rise, though, refinancing activity tends to slow, making the rights more valuable."
Basically, the recent one percent increase in mortgage rates since early May has caused refinancing activity to drop sharply. The value of MSRs is very sensitive to the level of refinancing activity--so much so that MSRs can be considered a "call" on higher mortgage rates. Newcastle Financial loaded up on MSRs at attractive prices, and the "base case" CPR (Constant Prepayment Rate) they modeled in presentations on their website is much higher than the current CPR. Newcastle was prescient to load up on MSRs prior to the recent upward move in mortgage rates, and NRZ investors are the beneficiaries of that prescience.
Nice find Dean. Doesn't this news act as a double edged sword in that the value of MSRs is higher (good for current protfolio) but makes obtaining their rights more costly (future portfolio) and harder to close deals at the right price?
Yes, it would. But banks are under pressure to unload their MSR's. So, although more valuable, it may not be more valuable to them but, as you indicate, it will make it harder to close deals that are as profitable as the prior ones. But, I would suspect that there are still only a few players in this space so maybe the effect is not as pronounced.
It's the way the game is played. Wells announced during their CC that they are exploring sale of MSRs in the second half of the year. But yes as conditions improves and rates go up the SPP will go up. At this point NRZ can still get mid teen returns but the returns in the twenties are long gone. But if the portfolio can balance out in the high teens that would be good. I hope they wait till the divvy gets in the .14 to .16 before they do an SPO so the money won't be a drag. If not then NCT can buy the Msr with the last SPO money and sale them to NRZ. Sort of like OCN does with HLSS. I hope we can get a big chuck like 100B to 200B UPB. this could easily put us in Q4 2014 at .20 to .23 per qtr divvy. If we can get a valuation close to HLSS that would put us at $11.40 to $13.10.
wallysboy1, I suppose that's true. On the other hand, when the stock market goes up, I don't usually complain that "now stocks are more expensive, so it will be harder for me to find and buy cheap stocks in the future".