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Oil Wasn’t the Only Asset That Went to Zero in March

It isn’t exactly news, since the Ocwen (OCN) earnings call was held on May 8th, but I was only just able to make my rounds through recordings for mortgage cos this past week for those I follow. One of my favorite highlights from the calls is Glen Messina, CEO talking about current margins and the ‘cash cost of servicing’. It is at about minute 36:00 if you want to listen to it here: https://edge.media-server.com/mmc/p/nx2pnfmv Here is a transcript of the relevant part:

“In terms of the profitability of new servicing, look, margins in the origination environment we’re in today are at levels few of us have seen in our lifetime. It’s a very robust originations market, both from a volume and a margin perspective. In our portfolio retention channel, the economics are such that fundamentally, MSRs — the cash cost of the MSR is zero. So we are — that MSR has come back — coming back to us without necessarily a cash investment. And margins and correspondent lending, again, are as wide as — and our flow channel’s wide as we’ve seen them in quite a long time. So the cash cost, so to speak, of MSR creation is well below the fair value. There’s a number of dislocations in the market, as you might be able to suspect, that’s kind of driving that. But the returns on MSRs today are some of the best we’ve seen.”

Now, one of my recurring themes I will write about a lot is that servicing rights have no value, and are a liability, not an asset. To be clear, there is a big difference between what Glen is saying when he says servicing rights are worth zero, and what I mean when I say it. What Glen is talking about is that the amount of cash he can get from the government for just the mortgage loan, without selling them the servicing right, is the same or more than he can get in private transactions for both of those things together. What I am saying when I talk about servicing rights not having value and not being a real asset is that fundamentally, I don’t think the activities that comprise residential loan servicing have value, and in fact, have negative value across consumer, mortgage banker and bondholder, serving no one and yet being called servicing. Glen’s comments delight me anyway because, well maybe we are sort of saying the same thing. I can remember in 2008 when servicing also ‘went to zero’, in the Glen sense. I seem to recall a lot of residential housing stock transferred from owner-occupied to investor-owned following that. (checks watch).

Other things that stuck out as general observations to think about:

Change in carry-back rules under the CARES Act. Seem lucrative, won’t help the federal debt any. Doesn’t do much for the folks paying the servicing fee. Why can’t individuals access their own, previously paid taxes in years when their income declines? Think how that might change behavior, and leave a (thoughtful) comment.

PennyMac (PFSI) is an overachiever. At hedging.

Updating on the oil tanker trade, we had earnings and…yeah. Not too exciting. I think last week we speculated that the air was out of the trade and it seems there is confirmation. That was anticlimactic. Anyway, I have FRO through June expiry and NAT all the way to October so we shall see. I have not had opportunity to really get into a post mortem on the trade but I think what we are seeing is the same phenomenon as the futures prices for oil: another sign post saying “not a V” . This tweet from @Chigirl sums it up for me:

Finally, I will confess my failed Tilray (TLRY) trade. It was pure speculation that earnings could surprise to the upside and make the shorts feel awkward. Another air biscuit. Option premium to the gambling Gods.

Teaser to keep you coming back: I am working on a product review for a VPN service provider, Orchid, which operates on a token called OXT. My effort at diving into to the incredible ecosystem of businesses and services in the crypto space. And we’ll be taking a harder look at some residential mortgage servicing stuff.

And, for your final take-away, @PeterMcCormack has produced a ton of great #bitcoin related content, including compressing his comprehensive, 17-part series on What Bitcoin Did into a paltry hour-twenty or so minutes. It can be found here:

https://www.whatbitcoindid.com/podcast/bitcoin-in-one-lesson