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The Fed’s recent announcement indicated no changes to the current Fed Funds rate, hence opening the possibility for a rate decline during their next meeting in September. It appears that the market has already built a 25 basis points decline in the mortgage offerings as we observe continuous easing in the 10 Year Treasury rate and the entire yield curve. As of July 31, 2024, the 30-year primary mortgage rate has retreated by 15 basis points while float income rates have declined by an average of about 45 basis points.
MSR portfolio holders should expect values to retreat from the previous month’s highs by about two to five basis points. However, those levels could vary depending on portfolio vintages and other portfolio characteristics such as agency and GNMA mix. The MSR market continues to show some pricing resilience despite recent declines in rates, however, MSR holders must remain diligent as the MSR market and values enter a period of uncertainty as the industry navigates through the Fed’s decisions and the potential impact on MSR values.
A bright spot within the MSR values has been the impact from escrows on values. Though escrows have kept values steady as borrowers monthly escrow payments continue to rise as property values kept rising; Monthly escrow payments lag home price appreciation by about 8-14 months; Therefore, we should expect another 15-20% increase in borrowers monthly escrow payments during 2025. Borrowers monthly escrow payments have increased by an average of about 15%-20% per year since 2022. The increases will have a positive impact on MSR values; However, the increases will further impact borrowers’ financial burdens that could potentially lead to higher delinquencies, particularly in regions where property values are very high. The increases could also lead to higher escrow advances that servicers must prepare for which could impact operations, especially since most operations are already under financial stress.
Mortgage prepayments remain low as we head into the traditional high prepayment and home buying season peaks. However, we continue to observe steady and persistent upticks in prepayments within 2020-2022 vintages that were virtually nonexistent prior to Q2 2024. We remain diligent and continue to monitor prepayments and delinquency trends and we estimate that they will remain relatively low and manageable. However, the ever-changing borrower’s behavior and economic conditions could add unexpected shifts in portfolios performance trends. The industry is experiencing robust HELOC, second mortgages, and non-QM originations. Recent indicators reflect 20%-30% quarterly growth in originations of such mortgage products. We anticipate this growth to continue through the remainder of 2024 and 2025. Many lenders are already planning to include such loan products in their product offerings.
Non-QM production continues to dominate the market in terms of growth as many lenders continue to enter this space as the values of such underlying assets remain strong providing decent yields and returns. Growth in certain products within this segment, such the DSCR loans, as the real estate market has been shifting towards investment properties offering investors attractive solutions that the GSEs don’t currently offer. Performance trends for such products have been relatively positive and are expected to remain stable in the foreseeable future.
Recent MSR bulk and co-issue activities continue to reflect price resiliency and healthy demand for legacy loans and current production. The MSR bulk market is expected to remain healthy and robust as we enter the last two quarters of 2024. Co-issue pricing continues to remain strong as low production persists for prime products. However, there are still opportunities that lie within less desired products such as low FICO scores and higher LTVs.
Bulk MSR trading values reflect levels of 5.0x – 5.50x multiples of servicing fees for agency loans, and there are signs that they could even go higher before Q4, 2024. Many potential sellers remain on the sidelines while there are large servicers interested in replenishing their portfolios’ fast declining principal balances. Even though prepayments are very low, the fact remains that those low interest rate loans will continue to experience rising scheduled monthly principal payments when borrowers make their normal monthly payments. With mortgage originations at very low levels, demand for MSR remains very high leading to higher premium prices for existing MSR pools as buyers look to stabilize their P&Ls.
We continue to advocate for our clients to capitalize their retained MSRs at moderate values. Fair values are stable and are not as volatile or sensitive as market values are. Aggregator prices are market prices and represent the aggregators’ willingness to pay premium prices that are much higher than fair values for newly originated loans. There is a risk in using those same price levels to capitalize retained MSR assets at those high prices. Our weekly MSR grids are fair value based and the values are designed to mitigate potential market volatility and will ultimately produce higher returns if lenders choose to sell their MSR in the future. Capitalizing retained loans at higher multiples of servicing fees could result in potential future losses stemming from selling bulk MSR.
As of July 31, 2024, the current 30 Year base mortgage rate is 6.8572%, which represents about 15 basis point decline from June 30, 2024, mark. We anticipate existing portfolio fair values to decline by 1-5 basis points from their 6/30/2024 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 have already reached maximum potential values and we should anticipate those values to soften as, and if, mortgage rates trend lower than 6.50%.
We also remind clients that while MSR fair values in basis points remain steady and strong, MSR dollar values are eroding at a faster pace because 2020 -2022 production have very low interest rates, therefore, as borrowers make their regular monthly payments, current scheduled principal payments make up approximately 40-60% of total principal runoff which includes portfolio payoffs. Most lenders are currently retaining only about 10%-30% of their production which barely covers the principal balance that ran off. This is the primary driver that is causing the dollar value of portfolios to continue to decline while the basis points values either flat or increase.
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 June 30, 2024, marks.
- Government loans between -2 to -5 bps change from June 30, 2024, marks.
- GNMA loans are experiencing a continuous uptick in delinquency rates which generally began in Q2, 2022. Due to the increase in delinquencies, we continue to monitor those trends and are consequently more cautious with our current GNMA fair value estimates.
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
