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60 We've already seen plenty of disconnected pricing, with some paying outrageously high multiples for MSR assets. new market dynamics rather quickly, and a buying spree for MSRs that began last year continues today. We've been witnessing eight and nine companies at a time bidding on packages, even for low coupon products. We've already seen plenty of disconnected pricing, with some paying outrageously high multiples for MSR assets. It's obviously a great time for MSR sellers. In fact, it's a lot like the current real estate market—it's a great time to sell because there's not a lot of inventory, and prices are soaring. But it's not a bad time to buy MSRs, either, given the profits that can be made in today's higher interest rate environment. I believe most buyers are overpaying for these assets. ere are a lot of companies out there with capital and a mandate to deploy that capital at all costs. However, there is a risk that many are paying too high a price. If the assumptions in their business models prove to be wrong and they don't see the returns they thought they were going to get, it may cause problems down the road. For some MSR buyers, there will be a time of reckoning when the chickens come home to roost. CHALLENGES THAT LIE AHEAD My company too has been a very active buyer of MSRs both on a bulk and flow basis. However, we are bidding prudently. Frankly, the prices some others are offering for packages are silly based on what we think is going to happen in the economy in the next 12 to 18 months. In fact, while MSRs are a profitable business right now, the magnitude of that profitability will likely change and narrow, because servicing challenges and costs are both heading higher. While it's impossible to predict what's going to happen beyond a single day with any accuracy, the entire housing market is probably going to be less favorable in the coming year. e way we think about the markets is very big picture. Employment, rates, housing affordability, and what's happening from a geopolitical perspective—including Ukraine and the cost of oil—are all going to put downward pressure on the economy, which is going to be problematic in our space. e reality is that many MSR buyers that have been in the market for some time do a great job at understanding cost of servicing. But others don't. Inevitably, some MSR buyers will bite off more than they can chew—or already have. Too often, a servicer that tries to be everything to everybody will find themselves looking for ways to cut costs and cut corners, which often results in internal control issues. It can also lead to a worse customer experience, which can put them in the crosshairs of the Consumer Financial Protection Bureau (CFPB) and other federal and state regulatory agencies. It can create institutional risks with their selling partners, too. And while mortgage defaults remain low, the prospect of a recession in the next year could change that scenario. If defaults do happen to rise, servicers and asset owners will have to spend a lot more time managing those assets, which is a much more high- touch process. Subservicers can simply charge more fees. But if you're servicing these assets in house, your expenses are going to rise exponentially because you're going to be spending more time on them. And if you struggle to have the infrastructure in place to begin with, you'll have to build it. Ultimately, we believe there's going to be some normalization, contraction, and compression around MSR margins, which will result in these assets being less profitable than they are today. We expect to see a lot less MSR flow in the marketplace and more portfolio retention. But whether they plan to buy, sell, or retain assets, servicers have plenty of options. RELATIONSHIPS ARE KEY For servicers that do want to sell MSRs, it helps to have a subservicing partner that is able to take those MSRs off their hands directly. Selling them somewhere else requires paying boarding fees to the new buyer, and if those assets are already being subserviced, there's a deboarding fee involved as well. Depending on the type of assets, there may be other expenses included, such as recertifying pools. Having a subservicer that can service the assets you want to keep, and buy the ones you don't makes Feature By: Allen Price