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Copyright © 2004 by servicing.com |
June
17th, 2004 |
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Servicing Values Advance Interest rates have continued to climb, but at a relatively slower pace than what occurred in the prior period from March to April-end. This increase in interest rates has further strengthened the market for mortgage servicing rights as buyers continue to be less concerned with prepayment risk. Sellers have been encouraged to bring their portfolios out for competitive auction, now that MSR pricing has recovered substantially from the depths of mid-2003. As a result, we have observed a measured improvement in the liquidity of servicing rights along with gradually better price discovery opportunities. Of important note is the slower pace of price recovery for smaller bulk portfolios. With many of the large, more aggressive buyers of MSRs not willing to purchase bulk servicing portfolios under $1 billion in unpaid principal balance, the demand and pricing for smaller portfolios is weaker than for larger portfolios. We feel this dynamic will continue for the near term and will only improve with continued interest rate increases and new buyers entering the market. The value of servicing rights on 30 year conventional mortgages picked up approximately 9.5% in value from April to May, with the MIAC Agency 30-Yr index ending the month at a 4.59 multiple. GNMA 30-Yr and Jumbo 30-Yr also experienced an increase in value, as did Agency 15-Yr, GNMA 15-Yr, and Jumbo 15-Yr, but to a lesser extent. 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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| Even though the bond market has now effectively priced in the broadly anticipated increase in the Fed Funds Rate expected at the end of this month as the FOMC pursues its tighter monetary policy, benchmark rates have still been creeping upwards even more compared to the end of last month. At the moment, however, rapid consumer price inflation appears to be in check and so Treasurys have reacted more favorably in recent days by recovering with a dramatic rally. The 1 Month Libor rate has moved up another 1 bps in May to finish at 1.11%. Both the 5-Yr and 10-Yr CMS rates jumped up 19 bps and 15 bps, respectively, while FNMA and GNMA Current Coupon Yields rose approximately 15 bps each. |
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Libor-swap spreads have widened again in May, and the Swap curve has flattened further. After tightening somewhat in the month of April, both FNMA and GNMA Mortgage/Swap spreads have remained about the same as of May-end. |
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MSR OASs Continue to Drop 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 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 graph displays the quarterly OASs from 4/1/2003 to 1/1/2004 and then the month-end OASs though 5/1/2004.
After peaking back in the summer of 2003, the GSA OASs have continued
to trend downward, dropping again in the month of May 2004 except
for a few select Conventional 15-Yr asset classes, which ticked
up 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 Decline Further The following tables reflect BMA historical dealer median prepayment forecasts. After a spectacular decline in BMA dealer consensus prepayment speeds observed in the month of April, the slowing of speeds has been prolonged through the month of May, but they did not decline at such a rapid pace comparatively. On 7/15/2003, 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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