In The Numbers

MSR Market Update

The MSR Market did not show much volatility during the first quarter of 2007. Mortgage rates stayed in a very tight range during this period, with the 30 Year Fixed Rate Freddie Mac Survey Rate Benchmark settling into a range of 6.16% to 6.30%.

Prime Conventional Prepayment speeds remained in the 9% to 15% CPR range for the majority of the 5.50% through 6.50% coupon product. Earning rates were also relatively flat for the quarter, with both the 1-month Libor and 5-year Swap rate holding steady for most of the period.

In the first four months of 2007 the bid value of our benchmark Generic Servicing Asset (GSAs) portfolio experienced only a slight bit of volatility, but overall the prices were essentially flat from year-end.

To recap, there was a pickup in mortgage rates in January of about 20 bps, and we saw MSR values in the GSA portfolio as a whole rise about 0.18 of a multiple, but then this was reversed by the end of February with a drop in mortgage rates and the GSA portfolio MSR values fell by about 0.25 of a multiple. Since February-end, rates have been slowly but steadily rising and MSRs have risen back up to be just about where they were as of December-end.

 

 

Transaction activity was somewhat muted with most of the trading activity being in small and middle-sized MSR portfolios. One notable trade of $9 billion of Agency and Alt-A servicing was brought to market in early March. Market participants indicated that the bidding was light, especially for the ARM segment and ultimately only approximately $6.7 billion of the $9 billion traded, further demonstrating a relatively weak market.

 

 

Subprime and Alt-A loans continue to be highly scrutinized by the marketplace. With headline news focused on the weakness in home price appreciation and partially due to lenders applying tighter origination standards, the more risky sectors of servicing such as Subprime and Alt-A are seeing performance deterioration as a result of many borrowers having a lack of alternatives for refinancing.
Overall prepayment speeds on this product have slowed substantially compared to earlier vintage pools. The continued reduction in equity takeout situations coupled with longer lead times for selling housing inventory should bode well for a prepayment slowdown over the medium term. A pickup in delinquencies caused by payment reset shocks along with tighter underwriting standards reducing the availability of mortgages for weaker credit borrowers is something that should be closely monitored. Subprime performance based on recent ABX index reports suggest delinquencies have somewhat stabilized, with a slower pace of increases in total delinquencies. It is safe to assume that on an age adjusted basis, 2006 pool performance on weaker credit pools will be the worst in recent history. However, recent 2007 originated product may have good potential performance based on the tighter origination standards and reduction in leveraged loans.

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