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Mortgage rates and some rate indices have experienced a slight retreat from their end of April highs, closing the month of May with robust gains over end of Q1, 2024 levels. Mortgage rates managed to end the month of May with a decrease of about thirteen (13) basis points, while float income rates decreased by about the same amount during the same period. MSR portfolio holders should expect a moderate value decline in the range of one to four (1-4) basis points from the end of April results. However, those decreases will 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 will persist as we navigate through the balance of 2024.
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.
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
