Servicing Prices Plummet!

Mortgage servicing rights experienced a significant depreciation of value in September. After a stellar July for owners of MSRs where mortgage rates climbed over 100 basis points, rates have retreated back to near the lows of June. The drop in rates has stripped servicing rights of most of the price appreciation that we saw in July. Servicing rights on conventional 30 year mortgages lost over 28% of their market value with the MIAC Agency 30-Yr index ending the month at a 2.91 multiple. The MIAC Agency 15-Yr index lost over 16% of its value to end the month at a 3.36 multiple. All asset classes saw significant declines with the Jumbo 30-Yr, GNMA 30-Yr and GNMA_ARM assets experiencing the largest losses. The volatility in servicing values that we have seen this year demonstrate the need for effective hedging strategies especially at times where we have very negative convexity as mentioned in last month’s market update.

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.

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 2003, Conventional 15-Year 5.5% Issue Year 2003, Conventional 15-Year 6.0% Issue Year 2001, Conventional 30-Year 5.0% Issue Year 2003, Conventional 30-year 5.5% Issue Year 2003, Conventional 30-Year 6.0% Issue Year 2003, Conventional 30-Year 6.5% Issue Year 2001, GNMA 15-Year 4.5% Issue Year 2003, 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 9/2/2003. These recent dates were selected because the BMA dealer consensus prepayment speeds are available to assist in the MSR pricing process.

After the large drop in OASs we saw on MIAC’s GSAs in July, OASs rose slightly in August and were up significantly in September. 1-Year into 10-Year swaption volatilities have steadily declined the last 2 months to levels not seen in over a year.

OAS Convexities:

In September, convexities for most asset classes rose above zero for the first time in 2 months. When convexity is positive, MSR prices will increase more for an upward rate shift than they will decrease for a downward rate shift.

BMA Prepay Speeds Rise

The following tables reflect BMA historical dealer median prepayment forecasts.

Dealer Consensus prepayment speeds rose sharply in September due to the large drop in mortgage rates. After 2 months of mostly decreasing speeds, we are now seeing speeds that are back to the levels of early 2003.

On 7/15, the Bond Market Association released a revised listing of mortgage assets and their prepayment speeds. These new assets better reflect the current mortgage market. The assets below without speeds prior to August 1st are some of these new assets.