MSR Retention in an Uncertain Market...MBA Mortgage Prime FRM 2.44 06/16 2.54 03/16 (3.94) MBA...

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MSR Retention in an Uncertain MarketNovember 9, 2016

MIAC Introduction

State of the Market

MSR Value Considerations

Execution Options

Bulk

Non-Bifurcated Co-Issue

Selling Pros and Cons

What to Expect as a seller

www.miacanalytics.com 2

State of the Market

Thanks to Brexit, over the span of two business days, the 10 Year

Treasury rallied by 28 basis points. As measured by Bankrate, this

resulted in a 21 basis point decline in the 30-year fixed-rate

mortgage. Accelerated prepays were quick to follow.


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Conventional 30 Primary Rate

State of the Market – Cont’d

Until Brexit, Ginnie Mae speeds outpaced Fannie Mae speeds for

similar coupons. The reasons for faster Ginnie Mae speeds are

numerous but are at least partly attributed to streamlines and the

lingering affect of reduced Mortgage Insurance Premiums (MIP).



Primary / Secondary spreads remain volatile but are

steadily trending higher.



Systemically wider spreads and volatile range bound rates are

helping to foster a recapture mentality with entire business models

now being built around recapture and the resulting trading gains net

of expenses.


71.26

80.99 84.22 89.74

96.93

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2012 2013 2014 2015 2016

MEAN 5-YR SpreadFreddie Mac 30 YR Primary vs. Freddie Gold Secondary


Thankfully fewer defaults are helping to offset some of the higher

Cost to Service.


Curr Value Curr Date Prev Value Prev Date % Change

MBA Mortgage Delinquent 4.66 06/16 4.77 03/16 (2.31)

MBA Mortgage Foreclosure 1.64 06/16 1.74 03/16 (5.75)

MBA Mortgage Prime 2.68 06/16 2.81 03/16 (4.63)

MBA Mortgage Prime FRM 2.44 06/16 2.54 03/16 (3.94)

MBA Mortgage Prime ARM 4.1 06/16 4.25 03/16 (3.53)

MBA Mortgage Subprime 15.09 06/16 15.44 03/16 (2.27)

MBA MortgageSubprime30 6.33 06/16 6.48 03/16 (2.31)

MBA Mortgage Subprime60 2.81 06/16 2.82 03/16 (0.35)

MBA Mortgage Subprime90 5.96 06/16 6.14 03/16 (2.93)

MBA Mortgage SubprimeFC 7.43 06/16 7.6 03/16 (2.24)

MBA Mortgage Subprime FRM 14.62 06/16 14.97 03/16 (2.34)

MBA Mortgage Subprime ARM 16.07 06/16 16.66 03/16 (3.54)

MBA Mortgage Delinquencies

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30/60/90 Delinquencies as Percent of Total Loan


Likewise, foreclosures have improved, which not only reduces

cost but can also improve foreclosure timelines.

The average time between last paid installment and foreclosure

sale is now approximately 20 months, per Fannie Mae.


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Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16

Foreclosure as Percent of Total Loan

Projected Origination Volume up from 2016 Levels

The latest MBA forecast predicts that 2017 purchase mortgage originations will

increase 11% from 2016 levels and will total $1.10 trillion this year. The latest

refinance estimate for 2017 now sits at $529 billion for a total of $1.63 trillion.

This compare to 2016 estimated levels of $1.89 trillion.

Despite a projected 40% decline in refinance originations, volatile

Primary/Secondary spreads will still cause many to proactively target their own

portfolio for refinance opportunities.

9


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Before the financial crisis, it was not unusual for some firms to value their MSRs

at 100 to 125 bps or even higher.

10

Fast forward to 3Q 2016

3rd Quarter Values for Wells Fargo currently sit at 69 basis

points.

3rd Quarter Values for Bank of America currently sit at 69.8

basis points.

At the end of the 3rd Quarter, JP Morgan’s MSR capitalization

rate was 80 basis points compared to 95 basis points one year

earlier.

At the end of the 3rd Quarter, Citigroup’s MSR capitalization rate

was 73.4 basis points compared to 87.0 basis points one year

earlier.

11



MSR Value Considerations

• How have the economics of retaining MSR

changed?

a. Regulatory

b. Capital

c. Funding

d. Recapture issues


Common Valuation Mistakes

Not knowing your market. Not all fair market values are created equal.

Economies of scale and counterparty risk are key considerations when

determining fair market value. Firms that have a $100 million dollar portfolio

and a $5 million net worth should not benchmark themselves to a much larger

institution.

Economic Value, a.k.a. your retention value should always be a consideration

when determining Best Execution.

Ignoring the regulatory impact on MSR values (recapture, cost of capital,

capital constraints, etc.…).

Having bad or incomplete data.

Over capitalization and under amortization.

13

Common Valuation Considerations – Cont’d


MSR Value Considerations – Cont’d


September 30, 2016

Assumptions Survey

Low Mean Median High Low High Low High Low High Low High Low High

Servicing Costs ($'s)

Conv Fixed 45 68 63 90 60 90 60 85 60 70 45 85 55 65

Conv Fixed w/recourse 55 73 73 90 60 90 60 85 80 90 55 90 55 65

Conv Arm 55 76 73 95 60 90 70 95 70 90 55 90 60 75

Conv Arm w/recourse 60 81 83 110 60 90 70 95 90 110 65 95 60 75

Conv Balloon 55 73 70 95 60 85 70 95 70 80 55 90 55 70

Conv Balloon w/recourse 55 79 78 100 60 85 70 95 90 100 65 95 55 70

Jumbo Fixed 55 77 75 100 65 100 70 95 60 80 55 90 65 85

Jumbo Fixed w/recourse 65 82 83 100 65 100 70 95 80 100 65 95 65 85

Jumbo Arm 65 86 88 110 65 110 80 105 70 95 65 100 70 95

Jumbo Arm w/recourse 65 91 93 115 65 110 80 105 90 115 70 105 70 95

Priv Fixed 55 80 73 110 70 110 70 95 70 100 55 75 65 85

Priv Fixed w/recourse 65 85 83 120 70 110 70 95 90 120 65 80 65 85

Private Arm 65 86 83 115 70 115 75 100 80 100 65 85 70 95

Private Arm w/recourse 70 91 93 120 70 115 75 100 100 120 70 90 70 95

Priv Balloon 60 83 83 100 70 100 75 100 80 100 60 85 65 90

Priv Balloon w/recourse 65 88 93 120 70 100 75 100 100 120 65 95 65 90

FHA 65 82 78 120 65 120 75 100 75 85 65 85 70 80

VA 65 82 78 120 65 120 75 100 75 85 65 85 70 80

Govt Arm 75 92 88 125 75 125 85 110 85 105 75 95 75 90

Broker EBroker Range Broker A Broker B Broker C Broker D



September 30, 2016

Assumptions Survey

Low Mean Median High Low High Low High Low High Low High Low High

Discounts (%)

Conv Fixed 8.5% 10.1% 9.6% 12.5% 8.50% 11.00% 9.50% 11.00% 9.00% 12.00% 9.50% 12.50% 8.62% 9.62%

Conv Fixed w/recourse 14.0% 18.5% 19.1% 24.0% 14.00% 24.00% 20.00% 20.00% 14.00% 17.00% 18.00% 20.00% 18.62% 19.62%

Conv Arm 8.5% 12.4% 11.8% 16.5% 8.50% 11.00% 11.50% 13.00% 12.00% 16.00% 11.50% 16.50% 10.87% 12.87%

Conv Arm w/recourse 14.0% 20.2% 20.4% 24.0% 14.00% 24.00% 20.00% 20.00% 17.00% 21.00% 20.00% 22.00% 20.87% 22.87%

Conv Balloon 8.5% 11.6% 11.3% 14.0% 8.50% 11.00% 11.50% 13.00% 11.00% 14.00% 10.50% 13.50% 10.62% 12.62%

Conv Balloon w/recourse 14.0% 19.8% 20.0% 24.0% 14.00% 24.00% 20.00% 20.00% 16.00% 19.00% 20.00% 22.00% 20.62% 22.62%

Jumbo Fixed 10.0% 11.7% 11.3% 15.0% 10.00% 15.00% 10.50% 12.00% 10.00% 13.00% 10.50% 13.50% 10.37% 12.37%

Jumbo Fixed w/recourse 14.0% 19.4% 20.0% 24.0% 14.00% 24.00% 20.00% 20.00% 15.00% 18.00% 20.00% 20.00% 20.37% 22.37%

Jumbo Arm 10.0% 14.7% 15.3% 17.5% 10.00% 17.00% 13.50% 15.00% 13.00% 17.00% 15.50% 17.50% 12.62% 15.62%

Jumbo Arm w/recourse 14.0% 21.2% 22.0% 25.6% 14.00% 24.00% 20.00% 20.00% 18.00% 22.00% 22.00% 24.00% 22.62% 25.62%

Priv Fixed 9.9% 11.5% 11.2% 14.0% 10.00% 14.00% 10.50% 12.00% 10.00% 13.00% 10.50% 13.50% 9.87% 11.87%

Priv Fixed w/recourse 14.0% 19.3% 20.0% 24.0% 14.00% 24.00% 20.00% 20.00% 15.00% 18.00% 20.00% 20.00% 19.87% 21.87%

Private Arm 10.0% 14.5% 15.1% 17.0% 10.00% 17.00% 13.50% 15.00% 13.00% 17.00% 15.50% 17.00% 12.12% 15.12%

Private Arm w/recourse 14.0% 21.1% 22.0% 25.1% 14.00% 24.00% 20.00% 20.00% 18.00% 22.00% 22.00% 24.00% 22.12% 25.12%

Priv Balloon 10.0% 13.7% 14.4% 16.0% 10.00% 16.00% 13.50% 15.00% 12.00% 15.00% 14.00% 15.00% 11.87% 14.87%

Priv Balloon w/recourse 14.0% 21.1% 20.9% 25.0% 14.00% 24.00% 20.00% 20.00% 17.00% 20.00% 25.00% 24.00% 21.87% 24.87%

FHA 9.5% 11.9% 11.3% 18.0% 9.50% 13.00% 10.50% 12.00% 10.00% 13.00% 11.50% 18.00% 10.12% 11.12%

VA 9.5% 12.1% 11.3% 20.0% 9.50% 13.00% 10.50% 12.00% 10.00% 13.00% 11.50% 20.00% 10.12% 11.12%

Govt Arm 9.5% 14.0% 13.1% 22.0% 9.50% 13.00% 12.50% 14.00% 13.00% 17.00% 14.00% 22.00% 12.12% 13.12%

Broker Range Broker A Broker B Broker C Broker D Broker E


• In addition to market benchmarks, “Know

your own portfolio”.


# of Loans Avg Bal Note Rate (%) Net Serv Fee WA Rem Term WA Loan Age Market Value Del30 Del60 Del90 Del120+/FK/BK Calc CPR

2,381 $113,996.24 3.631 0.250 233 35 $0 0.17 0.00 0.04 0.04 -

53 $130,295.97 3.587 0.250 262 2 $0 0.00 0.00 0.00 0.00 -

51 $100,127.81 3.611 0.250 198 43 $0 0.00 0.00 0.00 0.00 -

2,383 $144,164.40 $0

2,383 $112,929.32 3.634 0.250 232 36 $0 0.08 0.04 0.00 0.00 8.56

2 ($1,066.92) $0

Current Ending Period : 3/1/2016 $269,110,581 272

Net Change : ($2,314,476)

Sub Total : $273,224,225

Amortization ($4,113,644)

Loans Added $6,905,686 262

Loans Removed $5,106,518 248

Current Balance WA Orig Term

Previous Ending Period : 12/1/2015 $271,425,056 271



Good data is mandatory!

• iii. ASC 820-10-50-2 (e): This third requirement prescribes

a greater level of disclosure regarding the valuation of Level 3

assets.

“a reporting entity cannot ignore quantitative

unobservable inputs that are significant to

the fair value measurement and are

reasonably available to the reporting entity.”

17



For firms using LOCOM as their accounting

treatment, don’t forget to periodically reevaluate

your risk tranches.

Risk tranches need periodic reevaluation to account for increased product

diversity and/or any significant change in primary mortgage rates which

may relegate virtually all new originations into a single risk stratum.

Prevailing mortgage rates may move in either direction but if a firm is not

proactive in recalibrating the rate of amortization, they may be at greater

risk of either over amortization or impairment.

Reallocation of book basis within a homogenous risk stratum is an

accepted technique but caution should be exercised as this approach can

create a mountain of book basis with little offsetting market value.

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Data Error Reporting – Sample

19



Data Error Reporting – Sample Cont’d

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Data Error Reporting – Sample Cont’d

21



Bulk Execution Options

• The number of $10 billion plus size deals is down dramatically in recent years.

• Numerous deals in the $3B and less category but not all deals are closing.

• Reduced Demand for Ginnie Mae portfolios.

• Seller Counterparty risk heavily influences trading success.

• Numerous buyers now sometimes mandate a minimum net worth requirement of $10

million.

• Deal size heavily influences trade level.

• Capital thresholds influence on Deal Volume.

• Size and Back-testing are key.

• Buyers routinely ask for 6-12 months of actual prepay history when bidding on

packages.

• Don’t benchmark a $200 million dollar portfolio to a $200 billion dollar portfolio and

assume that the market participants (buyers) are one and the same with equal

economies of scale.

• Think of fair value as value that is equably accessible by all. Don’t include cross sell.

Value is not supposed to include recapture but some deals have occurred where

buyers will pay up for recapture.

.


Bulk Execution Options – Cont’d• Stage One

– MIAC will consult directly with seller to evaluate business strategy.

– Seller provides tape to MIAC for initial review.

– Pending initial review MIAC may request additional data that may lend support to a stronger

execution.

– If applicable, MIAC produces sale select that best supports Seller’s business strategy.

• At this point MIAC will begin preliminary discussions with known buyers for similar product. Goal

is to produce a select that first and foremost captures the seller’s requirements but will also

invoke buyer interest.

– Pending Seller’s approval, MIAC prepares the sale offering.

• Depending on the complexity of the proposed transaction, Stage One can take approximately 2

weeks from initial consultation to finalization of the sale offering.

• Stage Two

– Offering is presented to mass market and/or known potential buyers.

– Offering date is negotiable but will typically be 7-10 business days from initial offer date.

– Buyer will submit LOI (Letter of Intent) with a 24 to 48 hour acceptance period.

– Seller either accepts, rejects, or attempts to further negotiate proposed purchase price. Negotiation

can add 24 to 48 hours and MIAC will assist in those negotiation efforts.

• Stage Two with an interested buyer can last 2-3 weeks before final LOI is signed. More distressed

deals can take longer depending on the buyer’s level of expertise.

www.miacanalytics.com23

Bulk Execution Options – Cont’d• Stage Three

– Upon execution of the LOI, Seller needs to submit the necessary investor(s) form requesting transfer

approval. For FNMA the application form number is 629. For Freddie Mac the application form

number is 981. It’s prudent to submit early due to a 60 day investor approval timeframe.

– Pending a satisfactory review of seller’s financials and loan files, the Buyer will submit a Purchase

and Sale (P&S) Agreement for seller execution. The LOI should have contained all financial related

data but both buyer and seller must agree on all other sale related items and timelines.

– In addition to a review of the seller’s financial stability, the buyer will most likely perform either an on-

site or off-site due diligence review of a predetermined sample of the sale portfolio.

– Pending successful execution of P&S agreement the seller can expect to receive 70% to 90% of the

sale proceeds on the agreed upon sale date.

• Both buyer and seller should plan on Stage Three taking approximately 45 days from the initial

signing of the LOI to final execution of the P&S agreement.

• Stage Four

– The final stage includes transfer of the servicing and loan files and is governed by predetermined

transfer guidelines between buyer and seller. Depending on the terms of the deal, a separate

subservicing agreement between buyer and seller should fully address the obligations of both parties

to cover the time period between sale and transfer date. Time wise it is entirely up to the buyer and

seller regarding the time delay between sale and transfer date. The one caveat is that any purchase,

sale, and transfer agreement must receive agency or investor approval and must allot for certain

bylaws which mandate that borrowers be notified 15 days in advance of the pending transfer.


Bulk Execution Options – Cont’d

Know the rules and their impact on sale treatment.

Under SOP 01-6, transfers of servicing rights should be recognized

as a sale only when the following conditions have been met:

i. Title has passed;

ii. Substantially all of the risks and rewards of ownership have irrevocably

passed to the buyer; and

iii. Any protection provisions retained by the seller are minor and can be

reasonably estimated. If a sale is recognized and minor protection

provisions exist, a liability should be accrued for the estimated obligation

associated with those provisions. The seller retains only minor

protection provisions if: (a) the obligation associated with those

provisions is estimated to be no more than 10% of the sales price and

(b) risk of prepayment is retained for no longer than 120 days.


The Non-Bifurcated Co-Issue market is heavily dependent on

monthly volume and counterparty Net Worth but in the right

situation can result in executed transactions at very attractive

levels.

Some flow deals are being consummated as part of or

immediately following an initial bulk offering, but many of

MIAC’s recent offerings have been offered without the initial

bulk.

Many buyers have tightened up their acquisition guidelines

and now seek out sellers with higher Net Worth and higher

volume commitments but opportunities still exist for many.

26

Non-Bifurcated Co-Issue


The number of Non-Bifurcated Co-Issue buyers has

been fluctuating but can still be a very lucrative

option.

Co-Issue flow has proven to be a valuable option for cash

motivated sellers seeking to maximize their gain without the

hassle of long term MSR ownership.

Co-Issue flow can be a lucrative option for buyers and sellers

seeking longer term partnerships.

The “ co-issue ” program assists with cash and

capital management by monetizing MSR up front,

while providing the benefits of direct delivery.

27

Non-Bifurcated Co-Issue – Cont’d


MIAC has established relationships with strong

national MSR investors who are interested in long-

term relationships with MSR originators.

Benefits to Non-Bifurcated Co-Issue can include: Direct Sale to GSE

Speed of Settlement

Absence of Aggregator Overlays

Pricing Stability

Operational Efficiency

28



Competitive and Stable Price for MSR MSR grids are static for 30 or more days with periodic Par Note

Rate Adjustments.

Seller/Client gets separate pricing model in Market Shield for Co-

Issue Execution for each GSE delivery.

Co-Issue Execution is frequently the outright Best Execution, and

is often a compelling alternative to Aggregator Released or GSE

Retained execution.

Benefits to Non-Bifurcated Co-Issue can include: Simultaneous Transfer

Seller assigns servicing to MSR Buyer during delivery to GSE.

29



Seller reps and warrants transfer to MSR buyer ( “ non-

bifurcated”).

Seller usually avoids boarding MSR to servicing system or

subservicer.

Simple, straightforward deliver/settlement process with MSR

Buyer.

Introductions made through MIAC

Obligations of MSR Buyer (supported by MIAC)

Execution of NDA with Seller

Counterparty Due Diligence

Negotiation of Counterparty P&S Agreement

Definition of MSR acquisition process and funding logistics

Tracking and reporting on MSR deliveries

30



PROS

MSR values can hit what some may refer to as a “Glass

Ceiling” Rate cyclicality can create a lot of volatility in MSR values but

respective of the rate environment, there is a maximum cap that

buyers will not cross. Watch out for what could be an eventual Fed

Rate Hike and know that there is a ceiling to what this asset is worth.

Be aware of your economic value because for some the cap may be

lower than others.

For those that maintain their MSR’s on a LOCOM basis

The rise in MSR values can limit a firms ability to take short term

advantage of being able to recognize the upside in value. The

quickest and easiest way to recognize the spread between current

LOCOM book basis and Fair Market Value is to sell the existing

MSR’s.

31

Pros and Cons of Selling MSR’s


PROS

Regulation

The already thin margins makes potential increases to servicing

expense difficult to handle for everyone except those with the

most preferential economies of scale. Strategic transactions

designed to limit ones exposure to the increased regulatory cost

may serve to minimize a firms exposure.

Accounting Treatment

When taking into consideration the required accounting

treatment, the potential need for impairment testing,

amortization, and possible risk volatility mitigation, managing the

MSR asset can be complex even for those with sufficient

resources. Those not wanting to manage the complexity of this

asset may decide that a sell strategy is in their best interest.

32

Pros and Cons of Selling MSR’s – Cont’d


CONS

Impact on Future Revenue Stream

Selling MSR’s today may mean forgoing potential future

revenue streams, particularly if rates rise.

Customer Retention

Firms may choose a long term retention strategy solely

because they don’t want to pass their customer’s to

competing firms who may leverage the seller’s client base

for cross-sell opportunities. For those lacking in products,

infrastructure, or the resources to cross-sell, selling may

be a wise decision.

33

Pros and Cons of Selling MSR’s – Cont’d


Delayed approvals from GSE’s and Ginnie Mae

Plan on approval times of 30 to 60 days.

Subservicers routinely drive transfer dates

Due to bandwidth issues, some subservicers may require as

much as 90 to 120 days notification in advance of transfer.

Understand Boarding and De-boarding fees

Co-Issue deals may allow sellers to avoid both.

34

What to Expect as a Seller


Presented by: Michael Carnes

Director - MIAC Capital Markets Group

MIAC

(212) 233-1250 x 327 [email protected]


mailto:[email protected]

MSR Retention in an Uncertain Market...MBA Mortgage Prime FRM 2.44 06/16 2.54 03/16 (3.94) MBA...

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Transcript of MSR Retention in an Uncertain Market...MBA Mortgage Prime FRM 2.44 06/16 2.54 03/16 (3.94) MBA...