Copyright © 2003 by servicing.com .....................................................................................................May 7 , 2003

The MSR market was mixed for the month of April with some of MIAC’s MSR price indexes showing price appreciation and others showing a slight depreciation. The MIAC Conventional 30-Yr Index had the largest gains at a price of 1.97 times the servicing fee, up 12.6% from the previous month. The MIAC Conventional Balloon Index gained 7.1% ending the month at a 1.66 multiple. While the Conventional 30-Yr and Conventional Balloon indexes saw gains in April, the MIAC Conventional 15-Yr Index experienced a slight decline. The MIAC GNMA 15-Yr and 30-Yr Indexes also experienced slight declines in price.
Since May 15th 2002, all MSR asset classes have experienced significant price depreciation. The MIAC Conventional 15-Yr Index is down 49.1 % and the Conventional 30-Yr Index is down 56.7% driven by prepayment speeds more than doubling over the last year.

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 declined to a greater or lesser extent.

Interest rates continued to rally in the month of April especially at the long end of the yield curve. The 5-Yr swap rate was down 3 basis points and the 10-Yr was down 5 basis points. In March, rates had widened with the 10-Yr swap rate up 13.5 basis points, giving some short lived relief to the MSR market.

The FNMA 30-Yr and GNMA 30-Yr Current Coupon Yields were both down 10 basis points in April matching their lowest levels in history. On the other hand. The 1-Mth Libor rate rebounded from its record lows in March, to end the month of April at 1.32.

After a flattening of the swap curve in February, the curve reversed course in March and steepened with the LIBOR 1 Month rate dropping and the 5-Yr and 10-Yr swap rates rising.

In April, the curve reversed course again and flattened. The 1-Mth LIBOR was up 2 bps, while the 10-Yr swap rate was down 5 bps. The spread between the two rates is down to 286.5 bps from 293.5 at the end of March.

The 1-Yr into 10-Yr swaption volatilities decreased for the second straight month ending at 26.04%

As we have discussed previously, MIAC Analytics makes available Daily GSA OASes 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 OASes computed in MIAC Analytics with the actual GSA prices for six of the largest GSAs: Conventional 15-Year 6.0% Issue Year 1999, Conventional 15-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 OASes from 6/29/2001 to 9/30/2002 and then displays the 12/31/2002 year-end OASes though the 4/30/2003 April-end OASes. These recent dates were selected because the BMA dealer consensus prepayment speeds are available to assist in the MSR pricing process.


After two months of rising OASes, we saw declining spreads in April. This decline can be attributed to a decrease in long term interest rates and volatility. When the yield curve flattens forward curves flatten and therefore, expected prepayment speeds will increase and Option Adjusted Spreads will decrease.

OAS Convexities:

The convexity behavior of MSRs again is not obvious to a casual MSR market observer. Over the past six months, the convexity profiles of the MSRs listed below have improved dramatically. As prepayments hit record high expectations, if interest rates continue to fall, prepayment expectations will continue to go up but at a decreasing rate of increase. This decreasing rate of increase is captured in these GSA convexity profiles. In addition, if interest rates go up or down from here, the durations of these assets will further shorten. Because MSRs now have significant positive convexity, hedging these MSRs with long highly convex, options positions continues to be an expensive hedge choice.

BMA Prepay Speeds Reach New Highs

The following tables reflect the largest BMA asset classes and the historical dealer median prepayment forecasts.

DynamicMIMs is MIAC’s model to forecast where dealer consensus prepayment will be given any change in interest rates. The coefficients to DynamicMIMs are updated with each BMA survey results. DynamicMIMs is used at the beginning of a MSR hedge period for FAS 133 hedge effectiveness testing to predict where dealer consensus prepayments will be. At the end of the hedge period, dealer consensus BMA speeds are used in the pricing of the MSRs.

Below is a table indicating the statistical reliability of MIAC's DynamicMIMsTM forecasting model. Each time an actual BMA forecast set is provided, MIAC will update the coefficients to the DynamicMIMs model. For example, ninety days prior to an actual BMA forecast, the DynamicMIMs model is updated and can then be used to forecast BMA forecasts. If the coefficients to the DynamicMIMs model are used with the actual rate environment 90 days later, we refer to these as the 90-Day Forecast. The 90-Day Forecasts are then measured against the actual BMA forecasts 90 days later. If these same coefficients and DynamicMIMs model are used with the actual rate environment 15-days later, we refer to these as the 15-Day Forecast.

A paired two-sample T-Test is used to determine whether a sample's means are distinct. This T-Test form does not assume that the variances of both populations are equal. The corresponding 95% confidence critical value based on a sample size of 15 is 2.145. If the T-Test value does not exceed the critical value, then there is sufficient evidence that the mean PSA forecast is not distinct from the mean BMA PSA results. This testing was conducted with BMA from 5/15/2002 to 4/30/2003. More results can be found at www.servicing.com