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Copyright © 2004 by servicing.com |
July
21st, 2004 |
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Servicing Values Continue To Improve Interest rates took a breather in June, retracting somewhat from their levels at the end of May. On the MSR front there was increased activity in the market for mortgage servicing rights with several notable transactions occurring recently, some of them several billion dollars in size. Although volumes are still down substantially from their peak, the servicing market continues to try to establish a firm foundation from which to build upon. As previously reported, there are currently only a handful of active buyers in the market for large portfolios and even less for mid-sized and small portfolios. With these lower levels of demand, buyers have had the luxury of bidding very selectively with favorable pricing and terms. Premium portfolios with low, out-of-the-money note rates have traded at good levels but portfolios with slightly higher note rates have not fared as well. Going forward we expect to see a trend of increased liquidity as more buyers enter the market and more servicing portfolios are offered for sale. As of the end of June, MIAC completed its annual review of the characteristics of the Generic Servicing Asset (GSA) portfolio that is used to construct the MSR Product Type Price Indexes. MIAC has created some brand new asset classes and removed some older, smaller segments. In addition, some material changes to the characteristics of existing asset classes have been implemented. As a result, the change in the MSR Product Type Indexes from May to June may not be meaningful due to the distortion of the individual buckets. 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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| After one full year of inactivity, the Federal Open Market Committee finally made their move on June 30th and decided to increase the target Fed Funds Rate by 25 bps to 1.25%. Although inflation continues to be modest, certain economic indicators continue to improve and we expect that the Fed will prolong its accommodative stance as long as price stability remains under control. The 1 Month Libor rate moved up dramatically as of the end of June, in line with the Fed Funds Rate, by approximately 25 bps in June to finish at 1.37%. The 5-Yr CMS fell back slightly by 1 bps and the 10-Yr CMS rate dropped 7 bps. FNMA and GNMA 30-Yr Current Coupon Yields fell by 16 to 17 bps each. |
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Libor-swap spreads have reversed course and tightened again in June, and the Swap curve has flattened further. After remaining somewhat the same in the month of May, both FNMA and GNMA Mortgage/Swap spreads have tightened about 10 bps as of June-end. |
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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 7/1/2004. After peaking back in the summer of 2003, the GSA OASs have continued to trend tighter through the month of May 2004, but have recently widened, except for a few select lower coupon Conventional 30-Yr asset classes, which fell slightly. |
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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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In
the table above, the OAS durations or measurements of the anticipated
MSR price sensitivity
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OAS Convexities: 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 Slightly Higher The following tables reflect BMA historical dealer median prepayment forecasts. After a long decline in BMA dealer consensus prepayment speeds observed over the last few months, speeds picked up a little bit through the month of June, but are still well below their historical highs. On 7/15/2003 and 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. |
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Red indicates the highest forecasts on record and yellow the second highest. |
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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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