So You Want to Form an MSR Fund: Issues and Considerations

Despite COVID-19 conditions, US residential mortgage loan origination volumes have been at historic highs, driven by a refinancing boom spurred by low interest rates and new home purchases outside of urban areas. The current mortgage market is supported by non-bank mortgage originators and servicers who lack the same access to capital and liquidity as traditional banks. To continue growing, non-bank entities have had to be creative with respect to capital sources—as we have seen through recent public offerings. 

Non-bank owners of mortgage servicing rights (“MSRs”) are seeking asset-specific alternative private capital vehicles to fund portfolios of MSRs. However, unlike whole mortgage loans, MSRs cannot be easily created and sold to investors. Fortunately, through creative thinking and structuring, investors are able to utilize and enable non-bank, non-servicer, alternative capital sources to participate in the economics of MSRs. This Legal Update provides an overview of the phases and areas of consideration related to private capital vehicles that offer investment opportunities in mortgage servicing rights.