Mortgage Notes: UWMC Loses Two Harbors; Fed Researchers on MSRs
- Jun 17
- 9 min read
June 17, 2026 | The contest to see who will acquire mortgage REIT Two Harbors (TWO) seems to have ended in a defeat for United Wholesale Mortgage Corp (UWMC) and a win for CrossCountry Mortgage, the #2 retail lender in the US behind Rocket Companies (RKT). The TWO Board of Directors unanimously recommended a vote for the proposed transaction with CrossCountry Mortgage at the Special Meeting on June 23, 2026.
TWO announced that UWMC did not submit a new proposal during the waiver period that TWO obtained to engage directly with UWMC on a potential transaction. The waiver period expired on June 12, 2026. In essence, TWO demanded that UWMC make an all cash bid because, as we've noted in previous comments, the UWMC stock is essentially worthless as an acquisition currency.
Sad to say, UWMC does not have the cash nor the credit to meet this challenge. Since peaking above $6 in February UWMC has been falling steadily and closed at $2.45 on Tuesday. TWO demanded an all-cash offer from UWMC CEO Mat Ishbia because they knew that a significant number of shareholders would end up receiving the UWMC stock by default under the old offer.
UWMC has been bleeding cash for years, but recently adjusted its pricing in the wholesale channel, leading a number of other lenders to re-enter that market. Hopefully UWMC is going to moderate their pricing for loans in the secondary market and end the practice of selling servicing assets below cost to offset operating losses. Our previous comments about TWO and UWMC are below:
VA Finally Gets Partial Claim
The Veterans Administration officially launched a new Partial Claim program to help veterans with VA-guaranteed loans avoid foreclosure. The VA program covers overdue payments by providing a zero-interest, subordinate lien (second mortgage) on the home, which is repaid only when the property is sold, refinanced, or the main loan is paid off.
This program is similar to the partial claim program that the FHA has had for many years. The VA program officially opened for submissions on June 15, 2026. Mortgage servicers have until November 28, 2026, to fully integrate this program into their systems. Before receiving a partial claim, veterans must successfully complete a 3-month trial payment plan to prove they can stay current moving forward.
The overdue amount generally cannot exceed 25% of the outstanding loan balance. If your loan is 61 days past due, the VA automatically assigns a technician to review your file. You can also call the VA directly at 877-827-3702 for assistance.
While the FHA loan program is a subsidized scheme to assist low income and first time home buyers, the VA loan program is a benefit for people in uniform. It is nice to see that Congress, after years of acrimony and political kerfuffle, finally aligned the FHA and VA programs when it comes to serving veterans, who have half of the level of delinquency seen in the FHA loan program. People in uniform pay their bills.
Source: MBA, FDIC
Fed Paper on Mortgage Servicing Rights
Last week the Federal Reserve Board published a research note, “Mortgage Servicing Right Valuations Under Stress,” which was authored by Ronel Elul, Karen Pence, Ben Ranish, and Michael Suher. The authors note correctly that mortgage servicing right (MSR) valuations:
“Decrease when mortgage default and prepayment rates increase, as is generally the case when the economy enters into recession. To estimate how large these MSR valuation declines could be for the banking sector in a severe economic downturn, we project the potential increase in default and prepayment rates under the supervisory stress test models and scenarios for mortgages serviced by large banks.”
They then conclude:
"We estimate that the decrease in MSR valuations could range from 5% to 13%, depending on the scenario, as a result of the higher mortgage defaults. With respect to prepayments, we estimate that MSR valuations would fall by around 4% for each one percentage point increase in the prepayment rate (emphasis added). While this implied drop in MSR valuations is large, offsetting factors may make a prepayment-driven drop in MSR valuations less consequential for a bank than a default-driven drop."
The idea that MSR valuations will fall 4x the rate of increase in loan prepayments is not supported by the data, even "under the supervisory stress test models and scenarios for mortgages serviced by large banks." The research comment is also remarkable because it goes directly against the spirit of the proposal by the Fed and other agencies to reduce the risk weight for MSRs under Basel III. The paper also perpetuates the focus on the market value of MSRs, an unfortunate development for which we share some of the blame.
Years ago, we pointed out to our friends at Ginnie Mae the fact that some MSRs trade at very high valuations. We also noted that some of the more aggressive warehouse lenders would advance as much as 70% of the value of the MSR. But most MSRs never trade after the mortgage note is sold into the bond market. In fact, MSRs typically only trade once at the point of sale of the mortgage note into the MBS and then remain in place.
Banks often don't trade or capitalize the MSR at all when the note is retained in portfolio. Distinctions like “fair value” under GAAP simply don’t matter to most issuers. On occasion, distressed holders of MSRs may try to sell the asset to raise cash (such as UWMC, as noted above), but generally speaking, MSRs move once and then remain in place for the full duration of the asset.
Source: FDIC/WGA LLC
We asked a number of people in the mortgage industry about the paper. Most of the responses were anonymous. Several mortgage executives who commented on the paper had no argument with the 5-13% decrease in MSR values related to certain default scenarios, which seems to be a fairly reasonable general assumption given the high current valuations for MSRs.
The Fed research note barely mentions the role of hedging and recapture in protecting MSRs from fluctuations in value, and seems to ignore these factors in its quantitative conclusions. For example, as noted above, the Fed research note assumes a 4% decrease in MSR value per 1% increase in prepayment speeds, an assumption that seems at odds with the voluminous data available on MSR price performance.
One veteran observer told The IRA that the 4:1 assumption about the link between prepayments and fair value was ludicrous: “I would argue that 1:1 (1% increase in prepayment rates = 1% decrease in value) would be a closer generalization.” It is worth reminding readers that loss given default on $3 trillion in bank owned 1-4 family mortgages is currently averaging around zero.
Source: FDIC/WGA LLC
Another point that jumped out at us is that the Fed research comment seems to focus almost exclusively on the downside impact of falling interest rates and/or rising delinquency to existing MSR cash flows without giving much consideration to the natural offsets that many bank and nonbank servicers have in place. Of note, a special FASB task force voted on March 12, 2026, to recommend that lenders include recapture rights when valuing MSR portfolios.
For example, for independent mortgage banks and other active originators, rising prepayments do not necessarily translate into a dollar-for-dollar loss of franchise value. Many banks and nonbank firms have established recapture platforms that can retain a meaningful percentage of runoff through refinances, which naturally is reflected in the valuation. Recapture effectiveness varies by servicer, product mix, borrower profile, and market conditions, yet it can materially offset the reduction in MSR value that will otherwise result from higher prepayments in a static analysis.
The Fed comment also appears to largely ignore the benefit of new production. In the same environment where lower rates increase prepayments on existing MSRs, they also tend to stimulate refinance and purchase mortgage origination activity, creating opportunities to originate new loans and replenish servicing portfolios with lower coupon assets.
The paper notes that “nonbanks also are less likely to hedge the rate-driven fluctuations in their MSR valuations,” which is untrue especially for public issuers. For example, market leaders like Freedom Mortgage don’t hedge the MSR in the capital markets, but instead use robust recapture and new originations as an effective business hedge.
If you're interested in learning more about MSRs, we still have a few signed copies for sale in The IRA store of “Seeing Around Corners: Achieving Success in Business and Life,” our 2024 biography of Freedom Mortgage founder and CEO Stan Middleman.
For many mortgage market participants, the MSR is only one component of a broader mortgage franchise. Evaluating the servicing asset in isolation may overstate the economic impact of a declining rate environment. One mortgage executive noted that today's servicing portfolios are very different from those that existed prior to 2022. A significant percentage of outstanding MSRs were originated during a period of historically low mortgage rates.
For much of the pre-2023 collateral, it would likely take a very substantial decline in rates before refinance incentives became large enough to materially accelerate prepayments, even before considering recapture opportunities. As a result, the relationship between lower rates and higher conditional prepayment rates (CPRs) may not be nearly as linear as some stress scenarios imply. This is reflected in MSR pricing for different coupons.
The Fed analysis may accurately quantify the sensitivity of a static MSR portfolio, but it does not necessarily capture the economics of a functioning mortgage platform that can recapture borrowers, generate replacement servicing assets, or the reality that much of today's outstanding servicing book remains deeply out of the money from a refinance perspective.
More, the portion of a servicing book that is owned by third parties represents a significant source of fee income during periods of rising delinquency. But as Silicon Valley Bank illustrates, not all banks are able to manage MSRs and other variable duration assets like loans and MBS. Fed Vice Chairman Michele Bowman noted in February of this year:
“MSRs is not the right choice for every bank. Successfully managing the volatility in MSR valuations as interest rates change requires sophisticated hedging capabilities or an effective borrower retention strategy during refinancing waves. Servicing can also carry substantial operational risk and compliance responsibility. Banks that engage in mortgage servicing must have sufficient expertise and resources to manage these risks and the associated responsibilities in a safe and sound manner.”
The authors of the latest Fed research paper are right to be concerned about MSRs. As we noted in our comments on the Basel III proposal, the regulatory agencies ought to adopt a very tough policy to vet the management, systems and controls of banks that choose to be involved in mortgage lending and the retention of MSRs. Variable duration securities have been involved in many of the financial crises of the past half century, most recently with Silicon Valley Bank.
The plain fact is that few banks or IMBs have the leadership, personnel and systems to be successful as mortgage lenders and owners of MSRs. Most banks that want to expand into 1-4 family assets will likely outsource the servicing function, but retain the MSR and the mortgage note in portfolio. But even without the operational risk of servicing, banks must still have sophisticated systems for managing the credit and market risk of these variable duration assets.
Bottom line is that we are not surprised by the Fed research paper, but we are a little disappointed. The fact that federal regulators still no not accept the benefits of MSRs in 2026 seems rather remarkable given the popularity of the asset class with large institutional investors.
The large group of banks and nonbanks that do invest in MSRs and profit as a result suggests that there are significant benefits to these naturally occurring negative duration intangible assets. MSRs posess identifiable cash flows and other benefits, including the relationship with the borrower.
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