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The financial industry is awaiting the much-anticipated rate announcement by the Fed after their December FOMC meeting. The market is expecting the Fed to lower the overnight rate by another 25 basis points. The 10 Year Treasury rate has risen sharply during the month of November heading towards 4.50% which most economists deem risky for the economy. The current Treasury yield curve reflects financial market uncertainty, particularly because of the uncertainty the new administration brings during 2025. The financial market participants are split about the direction of mortgage rates. Some are expecting mortgage rates to remain elevated above 6.50% for most of 2025, thus adjusting their origination volume forecasts lower than initially thought, while others are anticipating rates to be lower than 6.50% during 2025 and are expecting better volume during 2025 than 2024 levels.
With all the different market signals and predictions, MSR values remain steady and are holding strong as we approach 2025. MSR values during the month of November should remain relatively flat compared to the month of October levels. However, one thing is certain, loan production volume is expected to remain timid during 2025, barring any unexpected and unforeseen political or economic events. The current market prices for new origination should remain high as aggregators continue to purchase as many loans as possible just to maintain their current book of business and market share. This brings attention to the recapture business that so many large lenders and aggregators have been counting on over the last two years. A few questions remain; Will the recapture business ever materialize for those MSR lenders and buyers that have been anticipating that it will materialize during 2025? Will the aggregators adjust their SRP levels lower due to the uncertainty about the direction of mortgage rates and the impact on their recapture business? For how long will aggregators continue to flex their financial strength to purchase loans? Many questions are to be answered as we venture into 2025.
More and more borrowers are opting for Non-QM, HELOC, and second mortgages. That market continues to expand at double digit rates of increases on quarterly basis and there is no slowing down in sight. Many lenders are expanding into that mortgage space as Agency loan production remains low. During these challenging times, new options arise that some should consider.
Mortgage prepayments, though historically very low, continue to reflect steady and persistent upticks across all vintages. Most of the prepayments resulted from the short-lived mortgage rate drop during Q3 and were concentrated within the 2022-2023 vintages. Although delinquencies continue to rise across all vintages as more borrowers 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 slowed down dramatically during the first two months of Q4. More lenders continue to sell to the aggregators as they continue to offer attractive prices. Co-issue levels reflect the current mortgage rates situation. Co-issue generally loses its appeal among buyers when mortgage rates are elevated past 6.50%.
Current SRP values remain about 11-15 basis points higher than fair values and the spread between the fair value and SRPs leveled off during the month of November. This trend should continue through the end of 2024. We continue to advocate caution when capitalizing new MSR production at moderate price levels as the market navigates current mortgage rate uncertainties. We are observing recent weaknesses in SRP prices, though very small, and we will continue to monitor and advise accordingly through our weekly fair value based MSR grids.
MSR Bulk Market:
After the mortgage industry experienced the sharp decline in mortgage rates in addition to MSR values during Q3, 2024, October brought some relief to the MSR values and should remain stable as we navigate through the final stretch of 2024. The bulk MSR market had weakened during Q4, 2024 due to mortgage rate volatility. Sellers opted to wait for better circumstances to sell MSRs, however, that window could change without notice. The demand for MSR remains strong and market values remain competitive as low MSR supply and persistent low production volume dominate the landscape.
The number of bulk MSR trades has declined during the first two months of Q4, compared to the previous three quarters of 2024. The MSR bulk offerings have been in a downward trend since Q1, 2024 and will possibly remain low through Q1, 2025. This downward trend in MSR bulk offerings should keep, or even increase, MSR bulk prices at high levels as demand for MSR persists.
Recent bulk MSR trading values reflect levels of 4.95x – 5.20x multiples of servicing fees for agency loans. Many potential MSR sellers remain hesitant to sell their MSRs due to loan production uncertainty driven by higher than anticipated mortgage rates. Many MSR holders depend on their MSR holdings fee income to maintain their business operations. Until mortgage lending activity shows some steady and robust increases in production levels, many MSR holders prefer to wait before selling some of their MSR holdings.
Non-QM and Second Mortgages Trends:
Non-QM originations continue to increase and dominate mortgage loans production as more institutional investors and new lenders enter this market. Non-QM loan production volume is expanding beyond DSCR (Debt-Service Coverage Ratio) products. More and more borrowers are opting for Non-QM loans after not being able to secure traditional Agency loans.
We anticipate this growth in these product segments to continue throughout the coming year. DSCR loans have become one of the most sought after Non-QM products by institutional investors due to 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 3.65 - 4.25 multiple of servicing fees while Second Mortgages and HELOC MSR products fair values are between 2.30 – 3.00 as more high balance loans are being produced. Some lenders are offering closed second mortgages with balances as high as $500K.
Mortgage Rates:
As of November 30, 2024, the current 30 Year base mortgage rate is 6.6944%, which represents about a 19 basis points decrease from the October 31, 2024, mark. We anticipate existing portfolio fair values to decrease between 1-3 basis points from their October 31, 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 decreases 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 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 is ranging 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 the 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 retreat by 1-3 basis points from October 31, 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 -2 bps change from October 31, 2024, marks.
- Government loans between -1 to -3 bps change from October 31, 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
