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Copyright © 2003 by servicing.com |
May
14th, 2004 |
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Servicing Values Dramatically Lower Interest rates dipped steadily through the first quarter of 2004 and the observed market value of servicing rights tumbled right through March 31st, but we have since observed a dramatic improvement in servicing valuations now that rates are climbing and prepayment speeds are slowing noticeably. Market prices for most classes of MIAC's GSATM (Generic Servicing Assets) have jumped in the month of April due to the broad sell-off in the bond market based on widely anticipated actions of the Federal Reserve, which has resulted in a rapid incre,ase in mortgage rates. Servicing rights on 30 year conventional mortgages picked up approximately 42% in value from March to April with the MIAC Agency 30-Yr index ending the month at a 4.19 multiple. Jumbo 30-Yr also experienced a material increase in value, as did 15-Yr Agency and 15-Yr Jumbo, but to a lesser extent. GNMA 30-Yr showed a decent improvement in value, whereas GNMA 15-Yr and Balloon servicing appears to have only picked up around 12%. 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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| The downward trend in interest rates in the first quarter of 2004 has clearly been reversed. Now that there is a broad consensus in the marketplace that the Fed will be tightening in the not-so-distant future (albeit at a "measured" pace), we have seen most benchmark rates tick up to levels similar to those observed last summer. The 1 Month Libor rate has moved up 1 bps in April to finish at 1.10%. Both the 5-Yr and 10-Yr CMS rates jumped up 92 bps and 76 bps, respectively, while FNMA and GNMA Current Coupon Yields rose approximately 66 bps. |
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Libor-swap spreads have widened again in April, and the Swap curve has flattened further. After widening slightly through the month of March, both FNMA and GNMA Mortgage/Swap spreads have tightened again as of April-end. |
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MSR OASs Continue to Decline 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 April 2004 except
for a few select Conventional 15-Yr and 30-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 moved dramatically into their typical negative territory for most Generic Servicing Assets, now that rates have begun to 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 Plummet The following tables reflect BMA historical dealer median prepayment forecasts. After another wave of higher BMA dealer consensus prepayment speeds observed in the first quarter of 2004, April speeds appeared to tumble significantly, reflecting a material drop in refinancing activity.
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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