MIAC Perspectives - Summer 2009
MSR Valuation Update
August, 2009.
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Robert Lee, Sr. VP
Capital Markets Group
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MIAC provides more third-party mortgage servicing rights (‘MSR”) valuations than any other firm. MIAC utilizes its proprietary Generic Servicing Assets (‘GSAs’) as benchmarks to measure the market pricing for MSRs. GSA pricing is available as a subscription on a daily basis on MIAC’s web site.
Overall
New loan MSR portfolio characteristics and projected payment performance have changed positively with the 2009 production. Not only are we seeing more favorable note rates, but agency production is reflecting full documentation, higher average loan balances, average FICO scores around 750 and loan-to-value ratios less than 70% overall. These characteristics predict stronger credit performance than earlier, more highly leveraged vintages.
Prepayment Speeds
Newly seasoned paper continues to prepay faster than 2006 and 2007 cohorts even for lower note rate products. However, within the 2006 and 2007 cohorts less pristine pools (credit- and LTV-impaired) are prepaying even more slowly.
MIAC recently introduced the MIAC Market Implied Prepayment (“MIP”) model which relies on the GSA pricing as proxies for the current market expectations on voluntary prepayments. MIAC’s MIPs model and GSA pricing enable MIAC to measure the specific differences in current market prepayment expectations between mortgage assets with different levels of credit- and LTV-impairment. We strongly encourage our readers to stay tuned to forthcoming research describing the MIAC MIPs model.
Delinquency
Depending on the collateral composition and vintage year, we’re witnessing an increase in delinquency levels on average 2% to 8% month-over-months. For instance, portfolios have delinquency levels that are twice as high as where they were last year. Lower credit, non-agency collateral is experiencing delinquencies in excess of 30% with the majority of the portfolio transitioning into the 120 + day delinquency buckets.
Throughout the credit spectrum, there is deterioration in collateral performance, with the exception of the new agency collateral discussed above. As consistent with our business control procedures for asset valuations, MIAC regularly reviews and analyzes collateral historical performance and attributes making modeling adjustments to the delinquency profiles for our portfolio valuations as needed. We recommend portfolio and credit risk managers and asset valuation committee members modify projected delinquency curves for these pools as performance continues to erode.
Summary
Market illiquidity, difficulties in funding delinquent servicing advances and increased uncertainty for both voluntary and involuntary prepayment projections are driving much of the recent volatility in MSR values. The early June sell-off that pushed mortgage rates higher was premature given market conditions, resulting in a subsequent backing off of those rate increases. We have seen a tighter range on both primary and secondary mortgage rates for the end of July. Additionally, we have seen 30-year primary mortgage rates decline on average 20 basis points between June and July and expect both a pickup in prepayment projection estimates and lower MSR values.
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