Finally, Servicing Prices Rebound!

After a two year period where it seemed to get worse and worse every month for mortgage servicers, we have finally seen a reversal in the market for mortgage servicing rights. With current mortgage rates reaching 6.25% for new conventional 30-Yr products and after the record refinancing of the last two years, the majority of the mortgage market is no longer in-the-money. As can be seen at the bottom of this report, Dealer consensus prepayment are down over 50% on most products. This dramatic decline in prepayment speeds has driven up the value of servicing rights despite concerns about volatility and the large supply of low coupon servicing rights created over the last two years.

MIAC’s MSR indexes were up over 50% in July with the MIAC Agency 30-Yr Index leading the way with an astounding 124.8% increase in July. After a dismal second half of 2002 and first half of 2003, servicing multiples are almost back to their levels of one year earlier. The MIAC Agency 15-Yr Index went from a 1.61 multiple to a 2.56 multiple, a gain of 59%. Similar gains were experience by MIAC’s Jumbo and GNMA Indexes.

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.

As we have discussed previously, 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 table below is the OASs computed in MIAC Analytics with the actual GSA prices for ten of the largest GSAs: Conventional 15-Year 5.0% Issue Year 2001, Conventional 15-Year 5.5% Issue Year 2001, Conventional 15-Year 6.0% Issue Year 1999, Conventional 15-Year 6.0% Issue Year 2001, Conventional 30-Year 5.5% Issue Year 2001, Conventional 30-year 6.0% Issue Year 2001, Conventional 30-Year 6.5% Issue Year 1999, Conventional 30-Year 6.5% Issue Year 2001, GNMA 30-Year 6.5% Issue Year 1999, and GNMA 30-Year 6.5% Issue Year 2001. The table displays the quarter-end OASs from 8/1/2002 to 4/1/2003 and then the month-end OASs though 8/1/2003. These recent dates were selected because the BMA dealer consensus prepayment speeds are available to assist in the MSR pricing process.

After the rising OASs we experienced over the last few months, spreads nose-dived to levels not seen in the last year. Significantly slower dealer consensus prepayment speeds due to rising interest rates are the leading cause of the drop in OASs.

OAS Convexities:

The convexity behavior of MSRs again is not obvious to a casual MSR market observer. Over the previous twelve months, we’ve been praising the increasing positive convexities that we saw with servicing rights. The benefits of this positive convexity panned out this month with the large increases in interest rates. In July, the convexity profile has declined with most assets hovering around the zero convexity level. If interest were to rally back to their June levels, we would expect to see heavy refinancing activity led by people who missed the boat the first time around. These conditions have improved the case for hedging with interest rate options.

What Goes Up, Must Come Down…BMA Prepay Speeds Drop Sharply

The following tables reflect BMA historical dealer median prepayment forecasts.

As we have discussed, August 1st, 2003 BMA dealer consensus prepayment speeds came in at significantly lower levels in July due to the large rise in interest rates. Listed below are the largest and newest asset classes in the mortgage market. On 7/15, the Bond Market Association released a revised listing of mortgage assets and their prepayment speeds. These new assets better reflect the current mortgage market. The assets below without speeds in previous months are some of these new assets.