A Strategic Approach to Managing Mortgage Servicing Rights
Rithm Capital (NYSE: RITM) is a leading global alternative asset manager with deep experience in real estate, credit and financial services assets, including mortgage servicing rights (MSRs). The US domestic MSR market is closely tied to the US residential mortgage market, which represents approximately $13.8 trillion in unpaid principal balance (UPB) of loans secured by residential real estate(1). Rithm has one of the largest portfolios of MSRs, with $830+ billion in UPB as of Q4’23(2).
The following report outlines the US mortgage servicing ecosystem, core servicing activities, potential realizable returns available through an investment in MSRs and actionable levers that historically have impacted investment performance. For an extended discussion of the financial drivers and the financial reporting associated with MSRs, as viewed through Rithm’s public financial disclosure, an Addendum is available at the conclusion of this publication.
Executive Summary
1. MSRs are integral to the functioning of the US housing and mortgage finance systems. MSRs, and the associated mortgage servicer, enable the flow of liquidity from borrower to various entities in the mortgage securitization value chain, including lender, issuer, guarantor, MBS investors and state and local authorities. These critical functions vary through economic and credit cycles.
2. The post-global financial crisis (GFC) reforms led to a migration of MSRs out of the banking system. This placed MSRs as a “frontier” asset in the realm of private credit, specialty lending and asset finance.
3. MSRs have emerged as an investable institutional asset due to a secular decline in demand from traditional financial services providers, as well as growth in independent non-bank mortgage enterprises.
4. Institutional investors have a range of public and private vehicles available to invest in MSRs as the evolution in markets has led to the emergence of both publicly traded independent mortgage companies and privately managed, specialized MSR funds.
5. MSRs’ unique financial attributes make them a compelling investment vehicle to realize attractive returns and can diversify a portfolio of private capital investments. The diversification attributes include high yielding assets bearing a negative duration profile.
6. Revenues from MSRs are often multiples of the cost to service which contribute to what historically has been a cash generative investment with the potential to deliver double digit returns.
7. MSR investment performance benefits from an efficient and integrated value chain including origination, servicing and special servicing to manage the performance of the asset throughout its lifecycle. Rithm believes that a platform needs to have robust expertise in capital markets, operations, risk management and dataanalytics to drive superior performance.
8. Industry origination and servicing standards have significantly improved since the GFC. These changes have resulted in reduced servicer losses and an increased need for specialized expertise to execute in a scalable manner. Improved technology has also streamlined the origination and servicing process.
9. Vertical integration of operations provides MSR owners the ability to protect and grow book value of the MSR asset through borrower retention in low rate environments, manage liabilities and hedge through capital markets instruments.
For the last decade, Rithm has capitalized on the opportunity to make MSRs accessible and investable. Rithm created the path for permanent REIT capital to invest in MSRs, providing the liquidity to allow banks to divest capital intensive assets.
(1) Source: Federal Reserve.
(2) Includes Rithm Owned Full & Excess MSR UPB, as well as MSRs serviced on behalf of third parties, pro forma for the acquisition of Specialized Loan Servicing LLC (SLS) as of December 31, 2023. Rithm Owned MSR UPB represents the UPB of the New Residential Mortgage (NRM) and the Newrez portfolio. On October 2, 2023, Rithm entered into a definitive agreement to acquire Computershare Mortgage Services Inc., and certain affiliated companies including SLS. As of the time of this publication, the transaction had not closed and is subject to customary closing conditions.
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