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Mortgage rates and other rate indices have managed to remain at relatively about the same level as they were at the closing in the month of May. Mortgage rates managed to end the month of June with a marginal increase of about three (3) basis points, while float income rates decreased by about eight (8) basis points during the same period. MSR portfolio holders should expect values to remain about the same level as they were at the end of May results. However, those levels could vary depending on portfolio vintages and other portfolio characteristics such as agency and GNMA mix. The downrate risk and its potential impact on MSR values continue to persist as we navigate through the balance of 2024.
Mortgage prepayments remain low as we head into the traditional high prepayment and home buying season peaks. Borrowers continue to feel some economic pressure and it is translating into minor increases in delinquencies. Even though delinquencies declined during Q1, 2024 after the seasonality increase in Q4, 2023, economic stress on borrowers overshadowed the resilient economy. Pressure on homeowners will continue to persist with higher monthly payments driven primarily by the rising home prices that is causing borrowers monthly tax and insurance payments to increase year over year. The average monthly tax insurance payments have risen between 20% - 40% ($150 - $400), depending on geography and natural disaster areas, since the beginning of 2022. Further analysis indicates that the monthly tax and insurance payments could rise another 10%-15% increase by mid to late 2025, particularly in states that experienced natural disasters. Most of the monthly tax and insurance payment increases are concentrated in vintages prior to 2023.
Rising monthly tax and insurance payments will have a positive impact on MSR values in the tune of an additional 1-3 bps which we have been observing in our recent valuation analysis. However, the tax and insurance payment increases will potentially lead to a higher risk of delinquencies as borrowers continue to deal with rising nonmortgage debt in addition to rising monthly tax and insurance payments. The rising monthly tax and insurance payments will impact some borrowers’ ability to pay their mortgage payments on time. Those increases could also manifest in higher than usual escrow advances servicers will have to pay which could add to companies’ financial and operational pressures.
We remain cautiously optimistic about the MSR market which is expected to remain healthy and robust during the remainder of 2024. We continue to observe better retention rates across the industry even as mortgage rates remain slightly elevated. Many lenders are currently opting for more MSR financing rather than the traditional warehouse lending facilities as MSR values remain high.
Bulk MSR trading values for existing portfolios are showing positive signs as we head into the second half 0f 2024. Buyers are paying 5.0x – 5.50x multiples of servicing fees for agency loans, and there are signs that they could even go higher. 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 monthly scheduled principal payments when borrowers make their normal monthly payments. With mortgage originations at very low levels, demand for MSR remains very high which is forcing mega servicers to pay premium prices for existing MSR pools to replenish their declining principal balances to stabilize their P&Ls. The irony is that a good percentage of lenders that own high in demand 2020-2022 vintage MSRs are carrying those MSRs at multiples of servicing fees that are closer or higher than 6.0x multiples of servicing fees. Current market prices of 5.0x – 5.50x multiple of servicing fees are unattractive to those lenders. Some of those lenders are relying on MSR financing instead rather than selling the MSR asset at a loss. At some point, MSR buyers may be forced to pay multiples that are closer to 6.0x, or even higher, to acquire more MSRs. The second half of 2024 will be a harbinger for what is yet to come.
During the second half of June, almost all aggregators have softened their SRP prices offered for new originations even as mortgage loans supply remain anemic. The average aggregator prices have declined by an average of eight (8) basis points since the first two weeks of June. This led to an increase in loan retention levels during the same period. However, aggregators SRP levels tend to shift unexpectedly at any given time without advance warning.
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 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 June 28, 2024, the current 30 Year base mortgage rate is 7.0204%, which represents about a three (3) basis point increase from their May 31, 2024, mark. We anticipate existing portfolio fair values to remain relatively unchanged from their 5/31/2024 marks, depending on the underlying portfolio characteristics. 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 already have reached maximum potential values and could potentially lose value if mortgage rates go beyond 7.00%-7.50% range due to the asset’s negative convexity and duration.
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 0 to +1 bps change from May 31, 2024, marks.
- Government loans between 0 to +2 bps change from May 31, 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 are currently monitoring those trends and are consequently more cautious with our GNMA fair value estimates at this time.
Mortgage prepayments remain moderate after a slight uptick during Q1, 2024, especially for GNMA production, due to the general low rates the market had experienced during those early months of this year. Borrowers continue to feel some economic pressure and it is translating in minor increases in delinquencies. Even though delinquencies declined during Q1, 2024 after seasonality increase in Q4, 2023, economic stress on borrowers overshadowed the resilient economy. With the continuous rise in home prices, though leveling off a bit since 2023, pressure from rising borrowers’ monthly tax and insurance payments could add another pressure point on borrower’s ability to make their mortgage payments. The home Price Index has risen by an annual average rate of about 15% since 2020, and borrowers’ monthly tax and insurance payments have risen by about the same rate during the same period. We expect those payments to continue to rise over the next 12-18 months. The nationwide average tax and insurance payments went up from an average of $235 to over $500 per month since 2020 and we expect that payment to increase to about $700 per month by mid-2025. It is too early to tell how or if rising tax and insurance payments will have a material impact on borrower’s ability to make their mortgage payment.
Rising tax and insurance payments should have a positive impact on fair value since it will lead to an increase in escrow float income, however, the downside could translate into higher delinquency levels, particularly in states like Florida, Texas, and California where tax and insurance payments have risen the most.
Aggregators continue to pay premium prices for new originations as the supply of mortgage loans remain anemic. We continue to advocate for reasonable and moderate MSR capitalization levels to hedge against any unexpected negative market downturn.
We remain cautiously optimistic about the MSR market which is expected to remain healthy and robust during the remainder of 2024. We continue to observe better retention rates across the industry even as mortgage rates remain slightly elevated. Many lenders are currently opting for more MSR financing rather than the traditional warehouse lending facilities as MSR values remain high.
Market values for existing MSR portfolios are generally receiving favorable MSR pricing which should continue during the second quarter of 2024. The current bulk MSR offerings activity is robust and expected to remain as such through Q2, and possibly during Q3, 2024. Current MSR market values are fairly in line with current fair value levels, within five to seven (5 - 7) basis points.
As of May 31, 2024, the current 30 Year base mortgage rate is 6.9965%, which represents about a 13-basis point increase from their April 30, 2024, mark. We anticipate existing portfolio fair values to lose some value from their 4/30/2024 marks in the range of about one (1) to four (4) basis points, depending on the underlying portfolio characteristics. 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 already have reached maximum potential values and could potentially lose value if mortgage rates go beyond 7%-7.50% range due to the asset’s negative convexity and duration.
We continue to 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 payments, the natural principal payments make up approximately 40-60% of total principal balance 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 April 30, 2024, marks.
- Government loans between -1 to -4 bps change from April 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 are currently monitoring those trends and are consequently more cautious with our GNMA fair value estimates at this time.
If you'd like to learn more about the current MSR market or have questions about your MSR strategy, please contact the MSR team.
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.
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Mortgage Capital Trading
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