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Copyright © 2006
by servicing.com
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January
27th, 2006
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Market
Commentary
MSR’s - Cash flow of the future We at MIAC wanted to give some brief historics on some of the major factors of the past three years that have affected the volatility of the Mortgage Servicing Rights (MSRs) asset valuation. |
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We have utilized the Freddie Mac Primary Market Survey (PMMS) in which Freddie Mac’s national mortgage rates are the average of 125 lender’s rates who contribute rates to Freddie Mac. These rates are based on a 30-year fixed rate mortgage with 20% down and a 80% financed over the life of the loan. On the Other hand, Short term Rates utilized for Float Earnings assumptions, Prepayment Projections for the Freddie Mac Primary Market Survey Rate (PMMS), and Mortgage Servicing Values (MSRs) have been quite volatile… |
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Mortgage Servicing Rights values have been steadily increasing to the peak levels that we witnessed in May and June 2004 when Mortgage Rates precipitously increased with major slowdown in prepayment speeds. MIAC ran new MSR values for 2005 based on an additional cohort with the following characteristics … 5.85% WAC, .25 Service Fee, 12 months age, $150,000 average balance, .80% Escrow, .40% Interest on Escrow, FNMA MBS Remit schedule and produced the following results… |
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Impact on MSRs The slowdown in prepayment projections, backup in escrow earnings rates coupled with the upward trend bias in mortgage rates have allowed for attractive Mortgage Servicing Rights Service Fee multiples. MSRs might soon become the cash flow darlings after much valuation volatility that we have experienced over the past few years. These MIAC Indexes represents the MSR price behavior of the entire 30-Year Conventional Agency MSR and 30-Year Jumbo MSR market and particular components within the marketplace have increased or declined to a greater or lesser extent. These Indexes DO NOT represent multiples indicative of the value of new production, current coupon servicing rights. |
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The 1 Month Libor rate moved up 10 bps through the month of December to finish at 4.29%. Interest rates were in a choppy range without any drastic move in either direction. The 5-Yr CMS decreased by 5 bps and the 10-Yr CMS scaled down by 10 bps. The yields on the 2Yr fell by 1 bps whereas the 5Yr decreased by 6 bps. FNMA and GNMA 30-Yr Current Coupon Yields decreased by 10 and 24 bps respectively. |
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In
December, the treasury and swap curves continued their downward
trend have flattened further. Both the 5 Year Swap-Libor and 10
Year Swap-Libor spreads declined further by 20bps. The spreads
between the 5 Year and 2 Year Note also narrowed by 6 bps. On the
contrary, the FNMA Mortgage-Swap spread and the GNMA Mortgage-Swap
spread marginally increased. The FNMA Mortgage-Swap spread and
the GNMA Mortgage-Swap spread widened 8 and 2 bps respectively. |
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MSR OASs Tighten The graph below illustrates the OASs computed in MIAC Analytics from the actual GSA prices for nine of the largest GSAs: Conventional 15-Year 5.0% Issue Year 2002, Conventional 15-Year 5.0% Issue Year 2003, Conventional 15-Year 5.5% Issue Year 2002, Conventional 30-Year 5.0% Issue Year 2005, Conventional 30-Year 5.0% Issue Year 2003, Conventional 15-Year 4.5% Issue Year 2005, Conventional 30-Year 5.5% Issue Year 2003, Conventional 30-year 6.0% Issue Year 2002, Conventional 30-year 6.0% Issue Year 2003, GNMA 30-Year 5.5% Issue Year 2003, and GNMA 30-Year 6.0% Issue Year 2002. The graph displays the monthly OASs from 6/1/2005 to 12/31/2005. GSA OASs reversed course to widen follow a general tightening trend
over the past two months. In December, the OASs for these benchmark
assets tightened across the majority of asset classes. |
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| Servicing.com
has provided daily IO/PO pricing on a portfolio of Trust IOs for
several years.
As a result, we can provide a comparison of
historical Trust IO OASs with the same interest rate model, volatility
inputs and OAS cash flow model as the historical GSA OASs. One
can see from the table above that Trust IO OASs don’t appear
to be well correlated to OAS behavior of the GSAs. This behavior
does
not support the use of Trust IO OASs as benchmark OASs for the
MSR marketplace. |
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MSR convexities have continued moving further into their
typical negative territory for most Generic Servicing Assets, as rates
persistently climb. When convexity is positive, MSR prices will increase
more for an upward rate shift than they will decrease for a downward
rate shift. When convexity is negative, MSR prices will decrease more
for a downward rate shift than they will increase for an upward rate
shift. |
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BMA Prepay Speeds pick up On 8/15/2005 the Bond Market Association released a revised listing of mortgage assets and their prepayment speeds to reflect the current mortgage market at the time. These new asset classes do not have historical speeds prior to that date. |
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More detailed BMA prepayment information can be obtained at www.servicing.com by viewing the Daily MIMs (Mortgage Industry Medians) data product. |
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