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11 key data sources for determining and benchmarking MSR values

What’s the best way to find supporting information about the residential mortgage servicing rights (MSR) asset? The asset trades in a fairly difficult marketplace and has always suffered somewhat from being opaque.

Knowing this, MountainView Financial Solutions, a Situs company, developed a list of 11 data points that support and benchmark MSR assumptions and values. The list – which MountainView uses in its independent valuation for clients – was presented on Sept. 10 during the firm’s MSR Asset Monthly Snapshot webinar.

“There’s been a greater emphasis from both regulators and auditors to make sure that people are sufficiently back-testing their portfolios and making sure that values are right, so this seemed like a timely topic,” said Mark Garland, managing director of analytics and head of MSR valuation at MountainView.

The initial data source discussed was servicing market activity. “We often get accounts that will say, ‘This is the only thing that matters – we should always be looking at market color, so forget about all of those other data points,’” according to Garland. He said they also frequently hear clients ask why fair value is different from market value.

Garland added that MountainView’s valuation, risk and transaction advisory teams all agree that market color is hugely relevant but not the only or most important data point.

“What we find is that it can’t trump all of the other data points – for several reasons, not the least of which is that it can be difficult to carry those market trades into your specific portfolio,” he said.

The second data source Garland went over in detail is the past performance of a MSR holder’s portfolio. This is a matter of reporting on and knowing exactly what your portfolio is doing.

“We’re always surprised. … Some clients have this at their fingertips and some don’t track this particularly well,” said Garland.

Every time MountainView takes a MSR portfolio to market, according to Garland, some of the first questions that potential buyers ask are about past performance: historical prepayment speeds, how delinquencies have been tracked, the history of advance balances, ancillary and late-charge income, and retention/recapture rates for refinances.

Garland highlighted three critical areas of MSR portfolio performance: data points buyers are most interested in, data points that have more internal significance, and the relationship of how a portfolio is performing against the rest of the industry.

Regarding the remainder of the list of 11 data points that support and benchmark MSR assumptions and values, Garland emphasized that the majority of data is very easy to collect. The full list is available within the webinar recording.

Additional special topics in this month’s webinar were the importance of credit score adjustments within MSR valuation models and a comparison of how two origination years – 2017 vs. 2016 – are showing significantly different prepayment speeds.