The MSR markets have experienced more volatility in the last few quarters than most servicing and risk managers care to recall.  Previous market sector fallout related to the Subprime contagion and non-agency origination shutdown is starting to creep into the MSR market with companies raising additional capital including through the use of Mortgage Servicing Right sales. 

      There has been a plethora of deals on the market for servicing rights creating some supply versus demand constraints.  Fairly large deals have had a smaller target audience of buyers causing some mortgage servicing auctions to be pulled prior to market auction.

      Recent prepayment estimations have shown heightened volatility among market consensus participants.  We have heard that the majority of internal marks are utilizing prepayment projections that are slower than the market consensus speeds.  Some clients are comparing, observed, state level prepayment speeds against model derived predictions to identify trends and differences used to justify slowing prepayments below the model derived projections.

      Additionally, when reviewing prepayment projections, the widening of current market rates between agency and non-agency product; (non-agency market rates are some 100 basis points higher than agency mortgage market rates) creates situations where many prepayment projections for non-agency product seem too fast and results in lower MSR values on this product.  Given the shutdown in non-agency originations, it makes sense to curtail the prepayment projections that are being applied for MSR valuations.  

      The continued pressures by the Fed to control these financial strains from the market’s aversion to risk and the practical shutdown of many sectors of the market has lead to proactive fed policy rate cuts of 300 basis points since the 5.25% Fed Funds target rate peak back in September 2007.  In the process, valuation gains from escrow earnings and prepayment float income on the MSR revenue streams have been curtailed.  Discussions exist along servicers regarding what earnings rate assumptions to apply when modeling.  We have had feedback from accounts that range from utilizing forward rate projections of the Libor and Swap rates to using internal funding rates to moving averages.  Oftentimes, an aggressive stance on one of the assumptions may be offset by a more conservative stance on some other valuation parameter, i.e.) discount rates, servicing costs, etc.

      With the continued market volatility of these various drivers of Mortgage Servicing Rights values, price discovery incorporating additional benchmarks and auction processes become more prevalent.  MIAC’s use of the newly incorporated Generic Servicing Assets (GSAs) has been extremely helpful for our market analysis.  We compile auction level results from some of the largest buyers and sellers of MSR’s and are able to provide a firsthand look at how the various participants view particular sectors of the MSR market, including areas that have been limited in trade activity.