The Impact of Mortgages on MSR Values

Rising mortgage rates are impacting the mortgage servicing rights (MSR) values negatively according to  MountainView Financial Solutions' webinar covering its MSR Asset Monthly Snapshot. Hosted by Mark Garland, Managing Director, Analytics; Mike Riley, Managing Director, Analytics; and Matt Maurer, Managing Director, Business Development, the webinar looked at the latest trends in and valuations in MSR.

“Obviously, our biggest story here is the change in rates,” said Riley. He noted that mortgage spread valuations had increased slightly, negatively impacting MSR values. Additionally, he notes that the last day of the month was very choppy, as there was a lot of rate movement between 2 pm and 5 pm ET.

Garland discussed MSR pricing, and the data sources MSR assumptions and values are derived from. On source discusses was servicing market activity, and Garland states that many would say “this is the only source that matters” when it comes to MSR value. However, he notes that although it is very relevant, market service activity can be difficult to translate and can often be thin and only represent a small number of buyers at a time. Additionally, market pricing might not actually represent buyers’ view of risk and reward and might not represent an exit price.

Also discussed was portfolio performance. Things that should be tracked in a portfolio include cost to service and custodial float options, but according to MountainView, it is incredibly important to measure how your portfolio measures up against the rest of the nation.

FICO rates were covered as well, as low FICO rates go into delinquency really quickly, and low FICO borrowers tend to go into default faster.

MountainView discussed recent MSR market activity, including three deals totaling $3.6 billion of Fannie Mae, Freddie Mac, and Ginnie Mae servicing scheduled to close. In addition, MountainView has six deals totaling $7.8 billion of Fannie Mae, Freddie Mac, and Ginnie Mae servicing scheduled to close in late October/early November.

MSR demand is high, especially in California, according to Maurer, but some buyers are still holding out for higher rates. MountainView expects reduced volumes to lead to reduced supply in the year, even as buyer appetite outpaces supply.

In the Ginnie Mae market, non-banks are expected to have a $5 billion to $8 billion per month supply, compared to $0 to $5 billion for banks. Low FICO Ginnie Mae servicing is in high demand, due to expected delinquencies.

“Understanding (or lack of understanding) of credit risk on lower FICO GNMAs may determine the longevity of several GNMA issuers,” said Maurer. MountainView states that today’s “hot hand” market could cool off tomorrow as buyers take turns on top bids.

“It’s why we believe in auctions because you never know,” said Maurer. “In a conventional deal, we might have 15, 16 targets. We never know who’s going to be the high bid.”

Contact MountainView for more information.