Escrow custodial account earnings have a significant impact on mortgage servicing right (MSR) asset values, and – in contradiction to what many holders of the asset might think – mortgages of borrowers with low credit scores aren’t prepaying slower than loans to borrowers with higher credit scores.
Those were two of the topics presented last week in the MSR Asset Monthly Snapshot, a webinar hosted by MountainView Financial Solutions, a Situs company. The recurring webinar covers the interest rate environment, MSR risk management, MSR pricing levels and MSR market activity for the previous month.
In the Aug. 8 webinar, Mark Garland, managing director of analytics and head of MSR valuation at MountainView, took a detailed look at the impact of escrow earnings on the value of servicing for newly originated mortgages. Garland explained that this analysis is part of his team’s ongoing effort to review the price adjusters for new production and analyze each adjuster in isolation.
“I think most people on the phone know there’s considerable value in float rates today,” said Garland in the webinar. “I think we’ve talked many times in the past that that’s where we’re seeing the appreciation in the asset.”
Float interest rates are the ongoing income received from money held in escrow custodial accounts over periods of time. A borrower’s money held in escrow is for payment of taxes and insurance, the “T&I” portion of monthly mortgage payments.
Garland’s presentation on the topic showed how the impact of float earnings on MSR values can vary by state, how there’s wide variability in the modeling of float earnings, and how holders of the MSR asset should reconcile the value of their float earnings to the industry to keep their modeling accurate.
While still discussing MSR pricing levels, Garland shifted to prepayment speeds and sought to dispel a bit of an industry myth: that low-credit-score borrowers prepay slower than higher-credit-score borrowers.
“At MountainView, we’re constantly thinking about low-FICO product, because we spend a great deal of time thinking about credit,” said Garland. “To be absolutely honest with you, I think our first thought was that this product, by its very nature, should probably prepay a little slower than general product. We’re about to prove with our own numbers that this is not true.”
Garland presented analyses showing very little prepayment rate variance across different credit score bands for both conventional and government mortgages at different interest rates.
The webinar presentation is available for online viewing. MountainView’s next MSR Asset Monthly Snapshot webinar will be held within the first 10 days of September.