MSR values boomerang amid latest volatility

Volatile rates led to losses in mortgage servicing rights by the end of the last quarter and then a rapid turnaround, and there was a bright spot in the non-QM segment, according to a new report.    

Depending on individual portfolio characteristics, MSR values fell between 4 to 10 basis points from July to September, Mortgage Capital Trading said in its latest monthly report. The declines contributed to an overall loss for the MSR trading segment, driven down by a rapid drop in interest rates of almost 80 basis points toward the end of the quarter. 

Yet almost as quickly, the MSR market showed signs of recovery as interest rates jumped back to midsummer levels within the space of a few weeks in October. They are expected to remain near those marks through the end of the year, MCT said.

The trading platform's researchers estimated that MSR values should recover at least 50% of the value they lost at the end of the third quarter. 

Service release premiums are currently between 12 to 17 points above fair value, with the spread widening in the latter part of October. 

"Demand for MSR remains robust, and MSR prices are competitive across all products and vintages," MCT said in its November report. "Low MSR supply and persistent low production volume have kept MSR values at very competitive levels and should remain so in the near future."

Researchers highlighted both the non-QM market as well as home equity lines of credit as holding potential for favorable returns. Originations for HELOCs and second mortgages grew at a pace of more than 20% quarter over quarter. 

Non-QM originations increased, largely thanks to interest from institutional investors. MSR fair values for non-QM products generally run at a multiple between 3.65 and 4.125 of servicing fees. 

"We anticipate this growth in these product segments to continue for the rest of 2024 and throughout 2025," MCT said.

DSCR, or debt service coverage ratio, loans, in particular, have become highly sought-after within non-QM thanks to the potential for higher yields and better performance, as institutional investors behind much of the latest interest. 

"Many insurance companies are actively adding non-QM whole loans to their portfolios," MCT said.

Bulk MSR trading volumes declined in the third quarter compared to the first half of the year. Market values, though, remained strong and should continue to offer favorable returns with loan production expected to be subdued if rates stay near current levels.

With levels of loan production uncertain in the near future, potential sellers are hesitant to sell MSRs, preferring to hang on to them for holdings fee income that to maintain operations, MCT suggested.  

The number of mortgage prepayments also ticked upward across all vintages but still stands at historically low levels. A majority of prepayments in the third-quarter rate resulted from the recent rate drop and was concentrated among loan originations from 2022 and 2023.