MIAC in the News: Tina Reid-Freeman is Featured in Mortgage News Daily
NEW YORK, September 28, 2010
On September 22, 2010, Director of MIAC’s Secondary Solution’s group, Tina Reid-Freeman was featured in Mortgage News Daily: Pipeline Press. In Rob Chrisman’s article, “Servicing Values, AOTs vs. Direct Trade, Profit Margins and Rate Sheet Pricing.”
"Servicing values have been relatively stable, and perhaps even improved a little, over the past year. This is for several good reasons; the credit quality of this year's book is probably the best in a decade; rates are at all-time lows, so investors can expect a long life; the real estate market has stabilized to a degree; and servicing is slowly beginning to trade in bulk again, improving liquidity. Although investors are putting decent values on servicing, they are actually a little lower than they were 5 years ago, and there are very good arguments that the economic value of this year's book may be much higher than the market values being assumed.
Then there is the issue of how much is being paid for the servicing by the conduits. This can be defined as the difference between how much cash you could get if you sold the loan directly to Fannie or Freddie in a security, and how much cash you can get selling it servicing released to a conduit. So if you could have securitized a loan for 102 and you sell to Wells at 102.50, you just sold your servicing for 50 basis points, a 2X multiple of the standard 25 basis point servicing fee.
The amount paid is based almost purely on supply and demand and has next to nothing to do with values. Historically, without fail, the amount of cash paid on rate sheets over the securities price goes up when rates go up and goes down when rates go down. This is purely based on competitive factors, and has absolutely nothing to do with value. When pipelines are full, investors take the all-in value of the loan, including servicing value, and take out a bigger profit margin not because the servicing is worth less but because they can. When volume is down, there will be intense pressure to keep the plants running, and the amount paid for loans (and therefore the net cash payment for the servicing) goes up!
So in its own perverse way, the secondary market pays the most for servicing when rates are high and volume is low - and the least when rates are low. This is the opposite of what the obvious economic valuation argument should be...low rate servicing stays longer and is worth more. High rate servicing is worth less, on an economic basis.
This is why we encourage all of our servicing-released sellers to have the ability to retain servicing when it is economically prudent. There are many, many cases in today's market when servicing is being 'given away' for very little, or even nothing, and in some cases even less than nothing (i.e., rate sheet price is below securitization value so the seller is paying to give away his servicing rights!!) There is no reason to give away this asset, particularly when there are very good subservicers out there and you don't even need to deal with the operational burden!”
For nearly 20 years, Tina Reid-Freeman has been an innovator in measuring and hedging secondary market risk. Tina joined MIAC in 2004 as co-head of MIAC’s Secondary Solutions Group. MIAC’s Secondary Solutions Group is responsible for providing daily pipeline hedge advisory services and the monthly third-party valuations of over $80 billion in mortgage pipeline product. www.MIACAnalytics.com .