Mortgage Servicers Rethink Recapture Strategies As Financial Benefits Fade

Rice Park Capital’s agreement to acquire Rosegate Mortgage highlights the increasing focus among mortgage companies on recapture opportunities. But industry executives say the economics of this strategy have grown more challenging amid intensifying competition.

In its latest move centered on recapture, private investment firm Rice Capital announced Friday that it’s buying retail and consumer-direct lender Rosegate to make its products available to mortgage servicing rights (MSRs) that lack embedded recapture agreements. 

The deal adds to several recent transactions — including Rocket Companies’ acquisition of Mr. Cooper Group and Bayview Asset Management’s deal for Guild Holding Co. — in which firms have looked to expand their servicing portfolios and lower customer acquisition costs. They’re also seeking to open doors to future origination opportunities — from refinances when rates fall to home equity products in any rate environment.

But building recapture into strategies can reshape companies’ economics. Reflecting these pressures, PennyMac Financial Services wrote to the Financial Accounting Standards Board in August, asking it to determine whether recapture should be incorporated into standard financial reporting.

Shifting economics of recapture

Ken Adler, managing director at Annaly Capital Management, said that the idea of pricing in recapture wasn’t historically common but a change brought about by the COVID-19 pandemic. During that period, rates went down to 3%, origination margins widened and the value of recapture went beyond the MSR value, creating material revenues, he said. 

“From that time forward, most industry participants are like, ‘How do I put recapture in the models?’” Adler said at IMN’s Mortgage Servicing Rights Conference on Thursday in New York. 

“They talk so much about recapture rate, but what they don’t talk about is recapture profitability. If you do recapture but you’re not making money on origination, that recapture has no hedging value to you.” 

Mike Petterson, chief operating officer at Freedom Mortgage Corp., said that although more companies are trying to model and price recapture today, “the premium price that you have on that recapture is essentially gone.” 

“Premiums are dwindling in this market we’re in right now, and I don’t see that changing anytime soon,” Petterson said.  

Petterson added that this dynamic pushes companies that offer both Ginnie Mae and conventional loan products to focus on Ginnie loans first, given their lower operational costs.

Another obstacle is competition from loan officers and brokers who have been “starving” for business since 2022, said Michael Lau, managing director of Bayview Asset Management.

“We’ve put a lot of time, effort and money into our direct-to-consumer platform, and we think we have a much better platform today than we had three years ago,” Lau said. “We’ll just continue to refine that and utilize what we think are sound assumptions in our models as it pertains to recapture.” 

The role (and limits) of scale

Some players have focused on gains via scaling — mainly through mergers and acquisitions (M&As) — to dilute costs. But these companies also face integration hurdles. 

“The scale game is what’s happening with this consolidation, and it’s only going to continue,” said Walt Mullen, chief strategy officer at Onity Group Inc. “People are going to yield benefits from scale — and those that don’t.” 

Still, there are limits. “Once you get to a certain size, the scale doesn’t change,” Petterson said. “If you are going from a $30 billion portfolio to a $300 billion portfolio, your scale changes drastically. But going from a $500 billion portfolio to a $700 billion or $800 billion portfolio doesn’t change much. It gives you more opportunities inside the portfolio.”