MIAC - MMMU - November


MSR Monthly Market Update

	www.servicing.com 55 John Street 15th Floor New York, NY 10038

November 17th, 2003

Servicing Multiples Rise but Remain Volatile

Following a down month in September for mortgage servicing rights, multiples were up in October for all asset classes. With interest rates rising and signs that they will continue to rise with the recent wave of positive economic indicators, dealer consensus prepayment speeds significantly declined in the Bond Market Associations semi-monthly survey results published on November 3rd. This decline in consensus prepayment forecasts bolds well for holders of Servicing Rights and led to a 13% price appreciation in the overall market for Agency 15-Yr rights and a 29% price appreciation for Agency 30-Yrs. The MIAC GNMA indexes also demonstrated robust growth with the 15-year index gaining 9% and the 30-year gaining 16%. Despite these gains, the servicing market continues to be extremely volatile necessitating all holders of servicing rights to carefully analyze their risk profile and hedging strategies.

While Servicing Rights experienced significant price appreciation in October, looking back over the last few months demonstrates just how volatile servicing rights are. While the Agency 30-Yr index was up 29% in October, it was coming off a September where the price declined by 28%. The large magnitudes of the durations of servicing assets result in large swings in pricing from even a mild change in the yield curve. This astonishingly high volatility of prices make the price discovery and valuation process difficult tasks.

Market trading volume has been extremely light during the month of October. Although prepayment speeds are showing improvement, buyers of servicing have been only marginally adjusting their prices. Many sellers of servicing have opted to wait until the New Year to execute their sales strategies in the hope that pricing will become more stable. On the buy side, savvy buyers have been hoping to find sellers who have year-end earnings pressure, with the thought being that prices on these MSRs will continue to trend upwards, albeit slowly.

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.

MSR Product Type Price Indexes:

	*8/1/03*	*9/2/03*	*% Periodic Change*	*10/1/03*	*% Periodic Change*	*11/3/03*	*% Periodic Change*
Agency 15-Yr	4.01	4.02	0%	3.36	-16%	3.79	13%
Agency 30-Yr	4.31	4.06	-6%	2.91	-28%	3.74	29%
Jumbo 15-Yr	3.71	3.72	0%	3.31	-11%	3.56	8%
Jumbo 30-Yr	3.90	3.69	-5%	2.75	-26%	3.39	23%
Agency BL	2.13	2.36	11%	2.14	-9%	2.54	19%
GNMA 15-Yr	3.69	3.69	0%	3.21	-13%	3.50	9%
GNMA 30-Yr	4.03	3.83	-5%	2.94	-23%	3.42	16%
GNMA_ARM	7.41	7.51	1%	5.63	-25%	6.31	12%

Price Multiples by GSA Product Type Index

Key Interest Rates:

*Market Rates*	*5/31/02*	*9/30/02*	*12/31/02*	*3/31/03*	*6/30/03*	*7/31/03*	*8/29/03*	*9/30/03*	*10/31/03*
1 Mth Libor	1.84375	1.81125	1.380	1.300	1.12	1.1	1.11938	1.12	1.12
5 Yr CMS	4.79	3.23	3.155	3.145	2.7365	3.805	3.935	3.245	3.676
10 Yr CMS	5.545	4.25	4.225	4.235	3.855	4.995	4.955	4.366	4.714
FNMA 30 CCY	6.21	5.29	5.076	5.009	4.648	5.722	5.67	5.012	5.335
GNMA 30 CCY	6.23	5.15	5.015	4.965	4.507	5.641	5.609	4.985	5.281

Recent Key Market Rates:

After 2 months of rallies on the long end of the yield curve, in October we saw rates climb back up with the 5 Yr swap rate reaching 3.676% and the 10 Yr swap rate reaching 4.714. Mortgage rates rose in similar fashion with the FNMA 30 Yr Current Coupon Yield ending the month at 5.335 and the GNMA 30 Yr Current Coupon Yield reaching 5.281.

Swap Curve Steepens; Mortgage-Swap Spreads Narrow

*Market Spreads*	*5/31/02*	*9/30/02*	*12/31/02*	*3/31/03*	*6/30/03*	*7/31/03*	*8/29/03*	*9/30/03*	*10/31/03*
5 Yr CMS – 1 Mth Libor	294.6	141.9	177.5	184.5	161.7	270.5	281.6	212.5	255.6
10 Yr CMS – 1 Mth Libor	370.1	243.9	284.5	293.5	273.5	389.5	383.6	324.6	359.4
FNMA 30 CCY – 10 Yr CMS	62.1	104.0	85.1	77.4	79.3	72.7	71.5	64.6	62.1
GNMA 30 CCY – 10 Yr CMS	68.5	90.0	79.0	73.0	65.2	64.6	65.4	61.9	56.7

Recent Key Market Spreads:

MSR OASs Show Mixed and Dramatic Movement.

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 11/3/2003. These recent dates were selected because the BMA dealer consensus prepayment speeds are available to assist in the MSR pricing process.

Despite the large gains in servicing prices that we saw in October, OAS were mixed with more seasoned servicing rights such as those issued in 1999 and 2001 experiencing very large increases in OAS while 2003 issues mostly experienced very large declines in OASs. These large swings in spreads make using a Constant OAS methodology a very ineffective means of valuing servicing rights. The 1-Year into 10-Year swaption volatility that we believe to be the best indicator of servicing volatility has increased over the last 2 months.

*OASs*	*10/1/02*	*1/2/03*	*4/1/03*	*7/1/03*	*8/1/03*	*9/2/03*	*10/1/03*	*11/3/03*	*% Periodic Change*
GSAs	30.87%	27.51%	26.88%	28.79%	25.26%	24.92%	25.61%	26.05
C15_5.0_2001						591	481	734	53%
C15_5.0_2003	408	1236	473	2387	878	768	1282	348	-73%