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Mortgage rates and some rate indices have experienced a healthy recovery from their lows recorded at the end of February, closing the month of April with robust gains over their end of the year levels. Mortgage rates managed to end the month of April with an increase of about fifty-two (52) basis points, while float income rates have increased by an average of thirty (30) basis points since the end of March. MSR portfolio holders should expect a moderate value recovery in the range of two to six (2-6) basis points from the end of March. However, those increases 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 2024.
The mortgage industry did experience a rise in prepayments during the January through March period, especially GNMA production, due to the low rates sustained during those early months of this year. Borrowers took advantage of the short-lived decline in rates to leverage their home equity and consolidate their debts. This is a harbinger of what could happen if mortgage rates drop to about 6.50%, borrowers proved that they are willing to secure a loan at those rates and are willing to give up their existing low interest rate loans under the right circumstances. We continue to remind clients that as 2020 and 2021 productions enter their third and fourth years of seasoning and with significant equity build up with those underlying properties, combined with record consumer debt levels along with increasing HELOC and second mortgage production, any decline in current mortgage rates may tip the borrower’s hand and motivate more to opt to refinance their low interest rate loans for debt consolidation purposes.
The Feds rate decision remains uncertain as we head into the second quarter of 2024. Strong economic figures and persistent high inflation could force the Fed not to act any time soon. MSR buyers continue and remain optimistic about the future of the MSR market. As mortgage originations lag expectations, aggregators are pushing the limits as to how much they are willing to pay for new MSR production. We advocate for reasonable and moderate MSR capitalization levels to hedge against any unexpected negative market downturn.
We remain cautiously optimistic about the MSR market, at this juncture, which is expected to remain healthy and robust during 2024. We continue to observe better retention rates across the industry due to slightly elevated mortgage rates. Many lenders are also currently opting for more MSR financing rather than the traditional warehouse lending facilities.
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 potentially during Q3, 2024. The primary challenge remains to be the volatile and uncertain rate environment. Additionally, current MSR market values are fairly in line with current fair value levels, within five to seven (5 - 7) basis points.
As of April 30, 2024, the current 30 Year base mortgage rate is 7.1312%, which represents about a 52-basis point increase from their March 31, 2024, mark. As previously outlined, we anticipate existing portfolio fair values to gain some value from their 3/31/2024 marks in the range of about two (2) to six (6) basis points, depending on the underlying portfolio characteristics. While overall values should remain strong, all of the 2023 and 2024 vintages will reflect the most volatility and at-risk products when compared to other vintages.
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 monthly 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 are 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 +3 bps change from March 31, 2024, marks.
- Government loans between 0 to +5 bps change from March 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.
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
