Predicting prepayments is arguably the most difficult aspect of modeling the value of servicing, but there are a few tactics and best practices we recommend.
Just like the channel 5 weatherman or the careful calculations of a rocket scientist, you can have a wealth of knowledge to inform an educated guess, but nothing can prepare you adequately for inevitably unexpected events.
In our Desktop Servicing Model (now MSRlive!), we take a logical and consistent approach to analyzing the factors that affect prepayments and in this guide will help you follow trends to forecast prepayments from borrowers.
We have created a series of articles, Servicing Insights Volumes 1-3, that will help to inform our readers of MSR servicing best practices and advice. In this blog, we will focus on “Prepayments in Servicing Valuation – Servicing Insights Vol. 3” which offers an overview of the immeasurable variables that are weighted when forecasting prepayments.
Servicing Insights and Strategies for Success
The series explains detailed aspects of servicing valuation & modeling for experienced mortgage bankers.
These strategies are defined by our industry veteran and author of the Servicing Insights series, Phil Laren. We are proud to make the insights of our servicing and modeling expert available through the Servicing Insights series. Phil Laren leads the MSR services group of MCT, and provides robust software, consulting, and valuation solutions.
We are dedicated to sharing seasoned insights and strategies for success with mortgage professionals everywhere.
Learn How to Anticipate Prepayments in Servicing
In this volume, we will review the challenges for how industry experts assess prepayment factors that affect the value of servicing. We’ll review important tactics for addressing the drivers of prepayments and how to look back at trends while anticipating future behavior changes of borrowers.
Servicing Insights Volume 3 outlines the drivers of prepayment activity and how our Desktop Servicing Model (now MSRlive!) approaches these changes. We will review the drivers of prepayments in detail, including rates, balances, credit characteristics, economics, and legislative environment. Next, we will clarify the steps for how the DSM forecasts prepayments, including median speeds, geographical location, principals, and a combination view of all of these together.
Learn the drivers of prepayments and the steps to assess these drivers with supportive visual guides.
“Prepayment modeling is an attempt to model human behavior. Like all attempts to model human behavior, there is a lot of variability in the results, and since even the most sophisticated models are an extremely simplified version of reality, there is an art to how the variables are input, adjusted and analyzed by the modeler to get the most representative model possible.” – Excerpt from Servicing Insights Vol. 3
About The Author – Phil Laren
Phil Laren has 29 years experience in all aspects of servicing, modeling, pricing, trading, negotiating, hedging, risk analysis, accounting analysis and operations.
He created the Desktop Servicing Model (now MSRlive!)that has helped countless Mortgage Banking professionals make the right decisions in their servicing valuations.
In this volume he explains prepayments in servicing valuation.
Read Servicing Insights Vol. 3: Prepayments in Servicing Valuation
We hope that this series of Servicing Insights will give you the assurance as a professional to weigh your risks and inform your judgments for each group of assets within your MSR services.
By utilizing these valuable and practical insights, you can look forward to a measurable difference in the certainty of your servicing decisions that will impact your bottom line directly. Download, read, and learn more from our experts.
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