Kroll Releases Overview of MSRs

Kroll Bond Rating Agency has released an overview of Mortgage Servicing Rights (MSRs). The term "MSR" generally describes a party's contractual rights with respect to servicing or controlling the servicing of a pool of mortgage loans owned by others, including the entitlement to receive servicing compensation. Outside the U.S., the concept of an MSR is not even accepted by many financial regulators and accounting rules which do not recognize intangible assets. In the U.S., however, the MSR is an important asset in the world of housing finance and investing. Over the past decade, MSRs on residential mortgage loans have evolved from an obscure intangible asset originated and held by mortgage lenders into a highly attractive alternative asset class sought by institutional investors. Kroll believes that MSRs are an attractive asset class for both lenders and investors, but carry considerable risks in terms of compliance and operational factors. Regulatory and compliance concerns remain among the most significant and immediate risks to investors operating in the MSR sector, but we believe these risks are likely to be relatively short-term. Kroll sees valuations for MSRs remaining high, roughly two times historical levels, both due to the Fed’s tightening of interest rates policy and an influx of investors seeking to exploit negative duration and the supra-normal, high single digit returns available in this asset class. Like legacy residential mortgage-backed securities (RMBS) and non-performing loans (both legacy and current), there remains far more cash on hand to put to work in MSRs than risk assets and the servicing capacity available to meet investor demand.