MBA NewsLink Q&A: BSI Financial’s Larry Goldstone Discusses MSRs

Larry Goldstone

Larry Goldstone is president of Capital Markets & Lending at BSI Financial Services, Irving, Texas. He is a 30-year veteran of the mortgage and financial services industries, including more than 10 years with BSI Financial. Larry works on all aspects of mortgage servicing, including capital markets strategies, communications, data analytics and strategic leadership. He previously led BSI’s mortgage servicing rights strategy as executive vice president of capital markets.

MBA NewsLink: Have recent economic and market conditions impacted investor sentiment and appetite for investing in MSRs?

Larry Goldstone: The fundamentals of MSR investing—such as predictable cash flows at a time when origination volumes are down—are still appealing. Select investors are snapping up MSRs at record prices. This surge is driven by a group of investors particularly interested in MSRs backed by mortgages with current interest rates. Their logic? If interest rates fall, servicers with the ability to recapture loans could see significant profits.

There’s also strong demand for MSRs backed by deeply discounted note rates. These portfolios are fetching high prices, although supply is starting to dwindle.

While some concerns exist about an increase in delinquencies and defaults, especially on government-backed loans, the potential impact is considered small compared to the other opportunities driving the MSR market.

Increased capital requirements have made some investors a bit more wary, as this could affect the liquidity and overall profitability of holding MSRs.

MBA NewsLink: What factors have been influencing MSR values and demand this year? Depending on any interest rate changes, what is your outlook for MSR values and profitability in 2024?

Larry Goldstone: Interest rates are one of the biggest factors behind MSR values and profitability.

The market for MSRs today is divided into two distinct categories: those backed by mortgages with low note rates and those with current note rates. Investors are drawn to each for different reasons.

Those who purchased low note rate MSRs before interest rates rose have already enjoyed significant price appreciation. However, since rates have climbed, the prices of these portfolios have stabilized, offering limited potential for further price appreciation. Essentially, these MSRs are priced assuming everything will go perfectly, leaving little room for additional gains.

Current note rate MSRs offer a different set of possibilities. If interest rates rise, these MSRs could increase in value. Additionally, with stable or falling rates, servicers have the opportunity to retain borrowers by offering them new loans. However, there’s a catch: if interest rates fall, borrowers are more likely to prepay their mortgages, which could lead to losses for MSR owners who lack sophisticated recapture capabilities.

This being said, my outlook is cautiously optimistic. If interest rates stabilize or decline, we may see a modest uptick in loan originations, which would support market liquidity. However, much will depend on the broader economic conditions, particularly the labor market and wage growth, which have a direct impact on the ability of homeowners to maintain their mortgage payments. Whether servicers leverage emerging technologies and data analytics to improve their operational efficiency will play a crucial role in their ability to stay profitable in the face of rising costs associated with managing delinquencies and defaults.

MBA NewsLink: What regulatory changes or developments do you anticipate this year or in 2025, and how might they impact mortgage servicing operations?

Larry Goldstone: Looking ahead, several key regulatory developments are likely to impact servicers. The CFPB has been increasing its scrutiny on servicing practices, especially those involving loan modifications, loss mitigation, and borrower communication. This is largely driven by a growing focus on preventing foreclosures and ensuring borrowers are aware of all the options available to them to stay in their homes. In addition, Fannie Mae, Freddie Mac and HUD have been constantly releasing new loss mitigation requirements and guidelines, some of which have not been easy for servicers to navigate.

Additionally, the introduction of new risk-based capital rules and tighter liquidity requirements may significantly reshape the servicing landscape. Pending banking regulations and Ginnie Mae risk-based capital requirements could influence decisions on whether to retain or sell MSRs, as well as impact the landscape of players in the MSR market. Another area in which we may see some changes is the management of escrow accounts.

As of today, the U.S. Supreme Court is expected to decide whether lenders and servicers must pay borrowers the interest they earn on escrow accounts, which about a dozen states already require lenders to do. Ensuring that escrow accounts are properly handled in light of these shifting scenarios could be a major concern going forward.

MBA NewsLink: What technology innovations are expected to shape servicing operations in the coming year?

Larry Goldstone: One pivotal innovation set to impact servicing operations is the integration of artificial intelligence (AI) and machine learning into the servicing of loans. Currently, these technologies are refining the way servicers interact with data and enabling them to assess risk more accurately and predict borrower behaviors with greater certainty. For example, AI algorithms can help servicers analyze payment patterns to identify potential defaults before they occur, so they’re able to proactively engage with borrowers with tailored solutions before they start missing payments.

Another significant innovation is the advancement of blockchain technology within the mortgage servicing sector. Blockchain promises to enhance the security and transparency of servicing transactions by creating immutable records of mortgage payments, modifications and other servicing activities. This can also help servicers reduce fraud and improve the auditability of borrower interactions, which improves trust among all stakeholders, including regulators.

Digital self-service platforms are continually being enhanced to provide borrowers with on-demand access to their loan information and the ability to perform transactions like applying for forbearance or modifying a loan online. These platforms have become increasingly user-friendly, which helps improve the borrower experience and potentially reduces servicing calls and operational costs. Robotic process automation is also transforming servicing by automating routine tasks such as account updates, payment processing, and compliance checks. This enables servicers to not only reduce the likelihood of human error, but also frees up staff to focus on more complex, value-added activities, which ultimately increases efficiency and improves borrower satisfaction.

MBA NewsLink: What key risks are currently associated with holding or investing in MSRs, such as recent borrower behaviors and delinquencies?

Larry Goldstone: To be sure, shifting borrower behaviors and the increasing likelihood of delinquencies are two of the biggest risks that impact the value and stability of MSRs. Both risks are likely to be amplified by the broader economy, interest rate fluctuations and regulatory changes, which we’ve already discussed. Right now, there’s a level of unpredictability behind both risks that will require servicers to embrace more robust servicing strategies to maintain profitability and compliance.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)