Andrew Davidson & Co. Inc. (AD&Co) proudly sponsored the Information Management Network (IMN)’s 10th Annual Mortgage Servicing Rights (MSR) Forum, held November 21 - 22, 2024 at the New York Marriott at Brooklyn Bridge. Our servicing expert Richard Cooperstein moderated and I spoke on the panel “Leveraging Trended Data to Enhance Your MSR Portfolio’s Mortgage Prepayment and Credit Modeling.” This panel focused on enhanced consumer data, its impact on delinquencies and prepayments (as shown in our white paper), and the process to bring the data and analytics into decision-making.

Other panels at the event discussed a variety of topics, including the interest rate outlook, macroeconomic factors, climate factors, and their effects on prepayments, escrow, originations, delinquencies, new versus seasoned MSRs, MSR supply and demand, and rate hedging strategies and functionality. The panel discussions underscored the need for a deeper understanding and management of the interest rate and credit risks embedded in the federal mortgage servicing asset. Recapture and the importance of good customer service were recurring themes throughout the conference.

Cautious Optimism for the MSR Market

The overall sentiment regarding MSR assets was a cautious optimism: Despite being a complex asset class, the MSR market remains strong, and people want to buy. Many panelists took the view that due to full employment, a strong GDP, and expectations about the economy and a large and increasing deficit, interest rates in 2025 would see at most a modest decrease before rising again. However, this view was not universally shared, with some pointing to a potential economic downturn and increased defaults being hinted at by delinquency trends in auto credit being close to pre-Covid levels, and the subset of Covid forbearance mortgages that will ultimately default.

For borrowers who already have low mortgage rates, there is limited room for modification; it is interesting to note that one servicer mentioned having some mortgages in foreclosure even with low LTV. Meanwhile, some borrowers bought homes in 2023 hoping to ultimately refinance into lower rates, but the opportunity has not arisen (and might not anytime soon). Finally, due to climate factors and inflation, insurance in some areas is becoming increasingly unaffordable or unavailable. In some regions, such as Florida, some condominium owners are facing massive assessments. One servicer noted that with the current high home prices, most consumers facing high insurance increases can sell their homes. However, there is evidence that when insurance premiums rise to the level of 30-40% of principal and interest, delinquencies also begin to rise. AD&Co’s Climate Impact Suite (currently in beta testing) distinguishes between the effect of climate change on home prices (through Climate Conditioned HPA) and the effect of high premiums on borrower behavior (through Climate Conditioned LDM), with the first effect feeding into the second; if the CLTV remains low, high premiums lead to increased turnover, but if the CLTV becomes high, delinquencies increase.

Uncertainty and the Importance of Prepayment Forecasting

In general, and especially with the new administration coming in, uncertainty was a key theme throughout the forum. It was suggested more than once that the economy may have some curve balls. Regardless – and as always – the ability to forecast prepayment speeds is key for valuing MSR’s. Prepayments determine the total base fee collected on a mortgage, as well as the earnings on escrow and payment float, which have become larger and increasingly important components of MSR valuation due to higher interest rates.

For current coupon mortgages, much depends on the interest rate forecast. For low-rate mortgages, however, it's important to understand the economics of turnover (especially when no rate incentive exists) and predict which borrowers are more likely to prepay at a low rate, such as 3%. The overall low prepayment rate among this set could potentially rise due to a pent-up demand to move, especially with more firms pushing for employees to return to the office.

Many panelists spoke about recapture, which was a prominent theme of the conference: recapture refers to the situation in which the servicer retains the borrower by servicing the new loan as well. Some servicers account for recapture in their valuation, and some use models for predicting recapture rates. The necessity of providing excellent customer service arose in multiple panels as essential for increasing recapture and selling ancillary products while also reducing delinquencies and defaults.

"Know Your Data and Your Portfolio"

One panelist observed that, in the current environment, it is now more important than ever for servicers to “know your data and your portfolio”. The topic was addressed during the AD&Co-moderated panel “Leveraging Trended Data to Enhance Your MSR Portfolio’s Mortgage Prepayment and Credit Modeling”. David Doyle of Sagent first discussed some of the challenges in understanding the strengths and risks of potential MSR acquisitions, while Gauhar Turmuhambetova of BlackRock outlined the challenges of using dynamic credit bureau data in the valuation of securitized products. Bindiya Jain of Experian described the granular loan-level insights available on their platform and specifically within their mortgage performance dataset. Then I shared research that illustrates how Experian’s trended data attributes may be used to improve mortgage prepayment and delinquency forecasts beyond what may be inferred from a traditional credit score. I also demonstrated through AD&Co’s MSRKinetics application how these improved forecasts would affect the base fee and cost components of MSR valuation for sample GSE and FHA loans, as well as their weighted average lifetimes and duration profiles.

Overall, IMN’s MSR forum provided a rich opportunity to engage with participants in the MSR industry, learn about their views and needs, and explore potential synergies.