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The Fed has announced another 25 basis points reduction in the overnight rate after their December FOMC meeting. The reduction was in line with what the financial markets were expecting. The surprise came when the Fed announced that they will only reduce rates twice during 2025 and not the anticipated four times as they have previously indicated. With this announcement, the 10 Years Treasury rate rose sharply to its highest levels in year; Currently, the 10 Years Treasury rate has been hovering around 4.50% which many economists deem as too risky for the economy. The mortgage industry remains optimistic about the overall rate direction during 2025. The financial markets still expect mortgage rates to drop below 6.50% during the second half of 2025, barring any economic or political surprises.
Regardless of all the current financial and economic news, MSR values have regained most, if not all of the losses that took place during Q3, 2024. The overall MSR losses during that period averaged between eight and ten (8-10) basis points. Since September 30, 2024, MSR values reflected steady increases in values month over month. The December 31, 2024, MSR values should reflect a total recovery from September 30, 2024, value drop.
Loan production volume is back to its lowest levels during 2024 after a surge in refinancing activities during Q3 and early Q4, 2024. It is expected to remain timid during Q1, 2025. The current market prices for new origination should remain high as aggregators continue to purchase as many loans as possible just to maintain their book of business and market share. Many aggregators are still hoping to gain from any refinancing activity through their recapture channels which many hope that 2025 will be that year.
On the bright side, the Non-QM, HELOC, and second mortgages originations closed out the year very strong, as many borrowers opted, for different reasons, for alternative mortgage financing. That market continues to expand in double digits rate of increases on quarterly basis and there is no slowing down in site. Many investors are entering this market and are encouraging lenders to produce such loan products. The demand is definitely on the rise and should remain so during 2025.
Mortgage prepayments, though historically very low, continue to reflect steady and persistent upticks across all vintages. Aside from the seasonality effect, the trend continues in its upward direction. Delinquencies also continue in their upward trend as borrowers continue to struggle with their rising debt and higher property taxes and insurance.
New Production Value Trends:
After a robust increase in mortgage refinancing activity during Q3 due to lower mortgage rates, it dramatically slowed down during the first two months of Q4. More lenders continue to sell to the aggregators as they continue to offer competitive prices. Co-issue levels reflect the current mortgage rates situation. Co-issue usually loses its appeal among buyers when mortgage rates are elevated past 6.50%.
Current Service release premiums (SRP) values remain about 11-15 basis points higher than fair values and the spread between the fair value and SRP has leveled off during the month of December. We expect the trend to continue for the foreseeable future. We continue to advocate caution when capitalizing new MSR production at moderate price levels as the market navigates current mortgage rates uncertainties. We will continue to monitor and advise accordingly through our weekly fair value based MSR grids.
MSR Bulk Market:
Bulk MSR values seem immune to mortgage rates volatility. Bulk MSR values remain strong as many buyers, including many new investors, remain aggressive in their MSR buying strategies. The demand for MSR remains strong and market value remains competitive due to the low MSR supply, and persistent low production volume dominates the landscape.
The number of bulk MSR trades has declined during Q4, 2024, compared to the previous three quarters of 2024. The MSR bulk offerings have been in a downward trend since Q1, 2024, but we anticipate it to improve during Q1, 2025. We are optimistic about bulk MSR prices to be robust and strong in the foreseeable future as demand for MSR persists. Recent bulk MSR trading values reflect levels of 4.90x – 5.30x multiples of servicing fees for agency loans.
Non-QM and Second Mortgages Trends:
Non-QM and second mortgage originations continue to increase and dominate mortgage loans production as more institutional investors and new lenders enter this market. Investor demand for such products continues to rise as traditional agency loan products remain low.
We anticipate this growth in these product segments to continue throughout the coming year. DSCR (Debt Service Coverage Ratio) loans have become one of the most sought after Non-QM products by institutional investors due to their potentially higher yields and better performance.
The underlying fair values and demand for such products are very competitive; non-QM MSR products fair values are between 4.00 – 4.75 multiple of servicing fees while Second Mortgages and HELOC MSR products fair values are between 2.30 – 3.25 as more high balance loans are being produced. Some lenders are offering closed second mortgages with balances as high as $500 K.
Mortgage Rates:
As of December 31, 2024, the current 30 Year base mortgage rate is 6.8788%, which represents about 18 basis points increase from November 30, 2024, mark. We anticipate existing portfolio fair values to improve between 1-4 basis points from their November 30, 2024, marks, depending on the underlying portfolio characteristics and vintage. While overall values should remain strong, most of value volatility will be concentrated within the 2023 and 2024 vintages as they are more sensitive to rate changes compared to 2020 – 2022 vintages. Almost all of 2020-2022 vintages should reflect slight increases in value as well.
Escrows and Float Income:
Mortgage escrow values remain robust and should continue to buoy overall MSR values. It is the second largest contributor to the overall MSR value as float income rates remain high. Property values are expected to rise during 2025 by about 4%-5% which could lead to higher borrowers’ monthly tax and insurance payments. Though that would be beneficial for MSR values, it increases borrowers’ default risk.
Float income rates have remained relatively unchanged since October 31, 2024, which will result in immaterial MSR value changes derived from mortgage escrows. The current float income rate ranges between 4.155% - 4.290%.
Rates Indices:
The treasury yield curve is becoming less inverted; However, it is relatively flat compared to Q3, 2024 as the financial market navigates the political and economic direction of the new administration. The yield curve continues to reflect financial market nervousness and Fed’s upcoming rate decision.
The spread between the 10 Year Treasury rate and the 30 Year Primary mortgage rate has widened again after showing some improvement in the prior month. The current spread stands at 252 basis points compared to 232 basis points as of October 31, 2024. The current spread remains higher than the normal level of about 170 basis points.
Fair Value Guidance:
Our estimate of the fair values for existing portfolios should improve by 1-3 basis points from November 30, 2024, marks, depending on portfolio characteristics.
For portfolios that have a mix of Conventional and Government loans, we anticipate Fair Value changes as follows:
- Conventional loans between +1 to +3 bps change from November 30, 2024, marks.
- Government loans between +1 to +4 bps change from November 30, 2024, marks.
If you have any questions or would like to schedule a call with our MSR team, please contact us today.
About MCT:
For over two decades, MCT has been a leading source of innovation for the mortgage secondary market. Melding deep subject matter expertise with a passion for emerging technologies and clients, MCT is the de facto leader in innovative mortgage capital markets technology. From architecting modern best execution loan sales to launching the most successful and advanced marketplace for mortgage-related assets, lenders, investors, and network partners all benefit from MCT’s stewardship. MCT’s technology and know-how continues to revolutionize how mortgage assets are priced, locked, protected, valued, and exchanged – offering clients the tools to thrive under any market condition.
For more information, visit https://mct-trading.com/ or call (619) 543-5111.
Media Contact:
Ian Miller
Chief Marketing Officer
Mortgage Capital Trading
619-618-7855
pr@mctrade.net
