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Copyright © 2004 by servicing.com |
September
20th, 2004 |
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Servicing Values Slip Again Accompanying a general flattening of the yield curve, mortgage rates once again dropped in the month of August by approximately 32 bps. Needless to say, the value of mortgage servicing rights slipped again this period as prepayment speeds notched up and the expected income from float and escrows reduced. There was more activity in the market for mortgage servicing rights in August with several notable portfolio offerings out for bid, ranging in size from a few hundred million up to ten billion dollars. Although volumes are still down substantially from their peak, there is no question that the supply of bulk portfolios being offered for sale has increased dramatically this year. As expected we have seen some buyers who were previously on the sidelines now re-enter the market, especially for large low coupon offerings. As of the end of June, MIAC completed its annual review of the characteristics of the Generic Servicing Asset (GSA) portfolio that is used to construct the MSR Product Type Price Indexes. MIAC has created some brand new asset classes and removed some older, smaller segments. In addition, some material changes to the characteristics of existing asset classes have been implemented. As a result, the change in the MSR Product Type Indexes from May to June may not be meaningful due to the distortion of the individual buckets. 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 Federal Open Market Committee raised the target Fed Funds rate by 25 bps on August 10th, but re-iterated its accommodative stance on monetary policy going forward, attributing the recent slowing of economic expansion, softening of the labor market, and elevated inflation on transitory factors such as energy prices. With price stability and economic growth expected to be sustainable in the near term, any tightening in monetary policy is likely to continue at a measured pace. The 1 Month Libor rate moved up another 17 bps through the month of August to finish at 1.67%. The 5-Yr CMS fell back 42 bps and the 10-Yr CMS rate dropped 40 bps. FNMA and GNMA 30-Yr Current Coupon Yields fell by 32 to 33 bps each, respectively. |
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Libor-swap spreads have tightened again in August, and the Swap curve has flattened further. After tightening about 1-2 bps in the month of July, both FNMA and GNMA Mortgage/Swap spreads have widened around 7 bps as of August-end. |
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MSR OASs Widen, and Tighten! 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 nine of the largest GSAs: Conventional 15-Year 5.0% Issue Year 2002, Conventional 15-Year 5.0% Issue Year 2003, Conventional 15-Year 5.5% Issue Year 2002, Conventional 30-Year 5.0% Issue Year 2003, Conventional 30-Year 5.5% Issue Year 2003, Conventional 30-year 6.0% Issue Year 2002, Conventional 30-year 6.0% Issue Year 2003, GNMA 30-Year 5.5% Issue Year 2003, and GNMA 30-Year 6.0% Issue Year 2002. The graph displays the monthly OASs from 10/1/2003 to 7/1/2004. After peaking back in the summer of 2003, the GSA OASs followed a tightening trend through the month of June 2004, but since then have appeared to stay within a certain range. The OASs for the lower coupon 15-Year and 30-Year assets have tightened whereas the higher coupons have widened. |
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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 Ramping Up The following tables reflect BMA historical dealer median prepayment forecasts. After a long decline in BMA dealer consensus prepayment speeds observed over the last several months, speeds picked up a little bit through the month of August, but are still well below their historical highs. The speeds for the 2004 Issue Year asset classes have steadily risen, however, and are now at their peak levels. On 7/15/2003 and 5/15/2004 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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