More Activity in the Servicing Market

 

The Continued Evolution of Non Agency Loan Classifications

Issuance Overview

In the last few years, we have witnessed a structural shift in the market share of agency and non agency issuance. In reviewing the MBS issuance of 2003, approximately 78% of MBS issuance was agency collateral as defined by FNMA, FHLMC and GNMA collateral with the remaining 22% of issuance being non-agency product. By the second quarter of 2005, agency issuance had declined to approximately 44% of total MBS issuance. Non Agency issuance as defined as private label jumbo, alt a transactions, and mortgage related ABS, including subprime, HEL, HELOCS, and high ltv loans comprised the remaining 56% of total MBS issuance. We have seen the federal agencies such as FNMA and FHLMC increase its market share of ‘down in credit’ loans while at the same time, subprime originators have gone ‘up in credit’; capturing some of the borrowers that initially would have fallen under more of the agency originator guidelines.

Sector Classification

Creating a distinction between the non agency prime and nonprime cohorts for the valuation of the mortgage servicing rights is of importance as prepayment, default and loan level performance varies to a large degree between these two asset classes. Non agency Prime loans originated in 2004 and 2005 can be best classified with loan level attributes that had average fico scores of approximately 730, fixed rates that averaged around 5.80% and arms below 5.00%, average balances of over $400,000 and average margins on the arm product below 3.00%. With the majority of market share in the non agency near prime sector focused on arms, the general characteristics of 2004 & 2005 originated Alt A arm product had average ficos of 710, ltv’s of 75, gross wacs in the mid 5’s and average balances of approximately $270,000. On the other hand, the more Alt B looking product had average ficos of 653, gross wacs in the low 7.00’s, higher ltv’s, average balances around $150,000 to $165,000 and average margins around 5.60%. The Subprime Arm asset class, having the largest market share in the non prime sector, had average gross wac’s again in the low 7.00’s, but with average ficos around the 610-620, ltv’s slightly over 80% and gross margins of approximately 6.00%. Portfolio performance varies widely between these various asset classes.

Impact on MSRs

With respect to the impact on MSRs, further granularity in msr asset classes distinction would result in quite dramatic valuation assumption changes to such major drivers of value as discount rates and cost to service, in both performing and non performing classes. Each asset class has very distinct delinquency and foreclosure curves in addition to asset specific prepayment vectors. Utilizing valuation assumption sets that are consistent in prime loan analysis for non prime valuation analysis will result in dramatic valuation differentials that can lead to mismatched risk exposure, mark to market variances, and potential write downs of the mortgage servicing asset.

MIAC has developed the most sophisticated analytical tools to tackle the increase complexity of these new asset classes. With the Fair Market Valuation looming in the near future holders of MSR assets should be thoroughly reviewing whether they have the right valuation assumptions and valuation methodologies in place for these new asset classes. MIAC expects to update the characteristics of the GSA portfolio once again in November 2005.

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.

 

The Fed has been raising short-term interest rates since late June 2004 and just recently raised the Fed Funds target rate once again another 25 basis points to 3.75%. This occurred in the face of the economic aftermath of Hurricane Katrina and surprised many who believed that there would be a pause in tightening monetary policy. The FOMC observed that economic output was still strong and growing before the damage to economic activity in the Gulf region, and that the hurricane would ultimately contribute to higher volatility of energy prices.

The 1 Month Libor rate moved up another 16 bps through the month of September to finish at 3.86%. Interest rates increased across the board with the 5-Yr CMS and the 10-Yr CMS rate moving up by 37 bps and 34 bps respectively. The yields on the 2Yr and 5Yr Note also increased by 34 and 33 bps respectively. FNMA and GNMA 30-Yr Current Coupon Yields increased by 36 bps each.

In September, the swap curve reversed course again, with spreads widening. The 5 Year Swap-Libor and 10 Year Swap-Libor spreads increased by 20 bps and 17bps respectively. However, the spreads between the 5 Year and 2 Year Note narrowed by 2 bps. The FNMA Mortgage-Swap spread and the GNMA Mortgage-Swap spread marginally increased by 2 bps each.

MSR OASs Widen

MIAC Analytics makes available Daily GSA OASs through the Daily GSA Pricing Service. Each day, MIAC Analytics will use the previous day’s current volatility of 1-Year into 10-Year swaption volatility as a proxy for mortgage volatility.

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 2003, 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 10/1/2003 to 4/1/2005.

GSA OASs reversed course to widen follow a general tightening trend over the past two months. In September, the OASs for these benchmark assets widened across the majority of asset classes.

BMA Prepay Speeds Deep Lower

The following tables reflect BMA historical dealer median prepayment forecasts.

After a marginal increase in BMA dealer consensus prepayment speeds observed in the month of September, speeds slowed down across the board in September, including the speeds for the Agency 30yr product, which declined by 16 % on an average.

On 5/15/2004 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.

More detailed BMA prepayment information can be obtained at www.servicing.com by viewing the Daily MIMs (Mortgage Industry Medians) data product.