We are more than halfway through 2022 and many buyers and sellers of MSR have expressed a general uncertainty as to the economics and strategies of MSR in the current market. With uncertainty surrounding the direction of both interest rates and prepayment speeds, and thus MSR values, many have started to look at their MSR strategies more diligently to mitigate risk and raise profit.
Read on below for MCT’s expert advice on the Top 5 Takeaways for the Current MSR Market.
Strategic MSR Portfolio Management is Critical
Interest Rate volatility can certainly create significant challenges for MSR Portfolio Managers. What we have experienced thus far in 2022 has highlighted the fact that nobody can accurately predict the direction of interest rates.
Even during periods of consistent rising interest rates, there is no guarantee that trends will continue. It’s essential to recognize that rising interest rates and rising MSR portfolio values generally result in balance sheet rewards, but there are also risks associated with booking MSR at aggressive levels. To mitigate that exposure, a thoughtful portfolio strategy must be established and followed consistently. To avoid enterprise risk exposure, that strategic approach includes monitoring portfolio MSR valuations frequently and book at reasonable levels that limit balance sheet volatility.
Develop a Strategic Retain vs. Released Approach
Implementing an effective retain vs. release MSR strategy should not be as basic as comparing prices based on static internal value multiples. Getting more sophisticated about the various components is recommended. It might appear appropriate to retain the high FICO loans and released the low FICO loans, but that approach would result in prepayment speed exposure that might not be anticipated.
Additional elements that should also be considered include MSR Financing impact, cash-flow impact, tax implications, break-even expectations, to name a few. The dramatic YTD decline in origination volume has some MSR portfolio managers considering changes to their current approach.
Add additional integral variables to your static price comparison to create a more granular and effective retain vs. release MSR strategy.
Leverage Granular MSR Values
Using generic or static multiples to build out a rate sheet will likely result in competitive exposure. The potential outcome is that your company will win the less attractive loans from an MSR perspective, and your competitors will win the more attractive loans.
Leveraging a more granular rate sheet approach, can be a differentiator in your market. During intensively competitive times like now, appropriately factoring in additional characteristics like LTV, FICO, GEO, and more, can make the difference. MCT has developed a new API that provides granular loan level servicing values, that can be used to inform your daily rate sheet. This more sophisticated approach will lead to winning the right loans and contribute to a more thoughtful MSR strategy.
Consider Other MSR Strategies & Opportunities
Market Values for existing MSR Portfolios remain very attractive, despite the recent IR volatility. With materially lower origination volumes, price competition and overall pressure on margins, many managers are considering bringing their portfolio to market. With that said, bulk MSR buyer capacity is still strong, but slightly off the peak prices that we most recently experienced Q1 of 2022.
Be Aware of Tax & Cash Implications of Excess Servicing
To avoid the potential for write-downs and overall impairment exposure the vast majority of Seller/Servicers takes steps to avoid retaining “Excess” Servicing. At a minimum, the internal value multiple of the excess spread must be materially lower that the base value. That approach would be used to avoid balance sheet disruption in times of IR volatility. As a result of the increased accounting complexities that come with excess, most sellers simply retain the minimum servicing spread of 25bps and Pass-Through the balance. If leveraging MBS execution, the excess can be sold to the GSEs in the form of Buyups.
Do you Need Help Managing your MSR Portfolio?
MCT’s MSR Services team wants to help you manage this asset both financially and operationally. We have the experience and the software to aide in your MSR decisions, starting from optimizing your retained/released decision to valuing your portfolio to analyzing the risks of MSR ownership, including interest rate and credit market exposure, to finally buying or selling your MSRs.
We’re here to help and we look forward to continuing to serve your MSR management and valuation needs.
