Are advances on a loan and the losses associated with them a part of the asset they've been taken against or are they separate entities? And while it is easy for mortgage servicers to think about revenue realization for more extreme delinquency levels, how can they account for those in the early levels of default? A recent webinar on mortgage servicing rights (MSR) performance for October by Mountainview Financial gave insights into these questions and how mortgage servicers can forecast their impact more accurately.
Presented by Mark Garland, Managing Director, Business Analytics, Mike Riley, Managing Director, Analytics and Matt Maurer, Managing Director Business Development, the webinar also took a closer look at how the rising interest rate environment was impacting the performance of MSR assets.
"Bonds have been selling off hard and very fast as rates are going higher," said Riley. "We saw a largely parallel shift in rates for MSRs on a month over month basis in September and despite the rising rates, there was no really large movement in mortgage spreads or volatility."
Looking at prepayment activity, Riley said that there was almost no rate term refinancing activity across most of the outstanding loan population.
Speaking about advances, losses and their relationship to mortgage servicing, Garland gave insights into whether advances should be counted as a part of the asset or as a separate entity in a financial statement. "At Mountainview, we believe that the cost of the advance is very much a part of the asset," Garland said. Explaining the implications of fair values on advances, Garland said that often with ABS products, when rates fell the value would go up because the cost of advance would go down. "Some people see the cost of advances as a reduction in custodial flow. The premise is that even though they don’t necessarily get everything together, some of these funds are fungible and they’re ultimately sitting with custodial balances so really the advances theoretically are a reduction in float opportunity," he said.
In terms of revenue realization Garland said that while it was easy to think about the revenue realization model for extreme delinquency levels, many servicers found it difficult to forecast the model for early-stage delinquencies. "When the consumer doesn’t pay, the servicer doesn’t get paid and it's very easy when we think of revenue realization when you go to the most extreme part of the default cycle like 90+ or 120+ delinquencies, but there’s not enough attention paid to the 30 and 60-day product," he said, while recommending that servicers must understand patterns in what percentages are collected versus anticipated, especially on varying delinquency levels.
Some of the other factors that made it difficult for servicers to forecast these models were issues where a lender paid mortgage insurance and partial payments or even events like hurricanes which can cause a good deal of disruption in the forecast.
To view the full webinar click here.
To see the slides from the webinar, click here.