MSR trading activity for the last quarter has been quiet as we have seen only a trickle of deals come to market and actually close.  As investors are nervous about prematurely committing to mortgage assets where more bad news has been the steady diet for the past 18 months, bidders continue to be extremely conservative in bidding assumptions.  Additionally, capital constraints and focus away from MSR’s may be some reasons for the lack of recent MSR trade activity.

      We are still seeing significant variances in market rates among originators on some of the non-conforming products.  This market rate dispersion is furthering the confusion and widening the variances of opinion about collateral behavior on the less liquid MSR assets.  However, low volume in new origination, limited product availability, and the upward bias in mortgage market rates is helping to substantiate stable to higher MSR values.

      With few MSR transactions observed in the marketplace leaving participants with minimal price points, MIAC’s Generic Servicing Assets (“GSAs”) with their virtual auctions have increased in their market acceptance.  In addition, market participants are increasing the relaying of model derived cash flows to measure the value price differentials of particular MSR portfolios.

      With the more limited number of MSR transactions for guidance, understanding the anticipated collateral behavior of particular portfolios has become increasingly important.  Servicers have focused on assigning additional weighting to the actual delinquency and prepayment performance of the MSR portfolio supplementing the standard market consensus voluntary and involuntary prepayment assumptions.  Prepayment model projections are regression-based and as a result widely varied.  Given the more limited mortgage product choices for borrowers of purchased and refinanced loans, we anticipate that voluntary prepayments remain slow for the near term.

      Moreover, MIAC believes that this anticipated slow down in voluntary prepayments for certain asset classes should offer value to buyers of MSRs as historical relationship between market rates and prepayment projections have decoupled for particular asset classes.  For instance, MSR participants would typically use standard agency prepayment projections on their nonagency, prime conforming, and jumbo base product.  Given the decoupling of agency mortgage rate spreads versus nonagency prime conforming and jumbo base product, using the same prepayment projections for similar coupon product on these two asset classes no longer makes sense.

      As the chart below shows, a 2006 vintage 6.00% MBS pass-through with a 6.55% WAC is projected to prepay at 288 PSA.  Taking a nonagency current mortgage rate on the assumption that its mortgage market rate is 100 bps wide of the agency, one would look at the 2006 7.00% pass thru and 7.64% WAC and see a prepayment projection of 403.  With today’s limited new origination options the nonagency is now not anticipated to prepay 40% faster than the agency counterpart.

      Lastly, we believe that it is important to focus on how your portfolio’s collateral is performing.  In various portfolios, we are seeing some of the larger clients provide additional prepayment information as their actual prepayments are running below prepayment projections.  Delinquencies among various cohorts have picked up substantially prior to the market shutdown of last year.  We are seeing some of the prime based MSR portfolios feeling some strain on the delinquency front.  Subprime MSR portfolios have somewhat stabilized in the past few quarters from an overall delinquency basis.  The more delinquent 90 plus product is consistently transitioning on to further stages of delinquency.