19 October, 2021
You’ve finally tossed those outdated servicing grids aside in favor of more precise mortgage servicing rights (MSR) valuation. Congratulations! With a new cash flow model, you’re maximizing the profitability of your MSR assets and avoiding period-end reporting surprises.
Why stop there?
Lenders of all sizes can gain even greater valuation precision and long-term value by pairing their advanced cash flow model with broker-managed assumptions. These assumptions help produce more accurate valuations because MSR brokers are in the marketplace each day, actively valuing and trading servicing rights. Through this process, these brokers work together with buyers and sellers to facilitate sales of servicing portfolios, giving them a thorough understanding of what’s available in the market at any given time, and what servicing may be worth to various parties. Since MSRs are considered a Level 3 asset, most auditors require a monthly, third-party valuation to corroborate the value of the asset. MSR brokers commonly provide these monthly valuations to lenders and that valuation is used for the value of the asset reported in financial statements.
“Servicing rights are esoteric, opaque assets, and active MSR brokers have a unique lens into the market that enables them to produce highly quality valuations,” said Brett Schaffer, CEO and founder of PHOENIX, an industry-leading, high-volume MSR sales advisory and analytics firm. “MSR assets aren’t like shares of stock; you can’t pull up a ticker every time you want a sense of the value, and that’s where experienced MSR brokers like PHOENIX can help. Since we actively trade MSRs in both bulk and flow transactions, we have a particularly unique view into this complex market.”
The following list outlines the top reasons broker-managed assumptions should be a standard component of a lender’s MSR valuation processes.
1. MSR Brokers Actively Value Servicing Assets
The fact that MSR brokers are actively pricing and trading servicing rights, day in and day out, cannot be stressed enough. This means that lenders get a direct link to the market by way of these brokers, who observe the ebbs and flows in the marketplace firsthand. By observing market participants trading servicing in bulk packages and flow packages, they have an intimate look into what servicing is worth.
2. Valuation Consistency
Many lenders already leverage MSR brokers to conduct third-party valuations of their servicing portfolios each month. By using the same assumptions during origination and in between month-end reporting, lenders have access to more consistent values throughout the entire life of the loan.
3. Real-Time Access to Live Assumptions
Timeliness and accuracy are critical when modeling MSR values, and broker-managed assumptions enable lenders to dial into the most readily accessible, real-time assumptions. MSR assets can be highly volatile, and access to live assumptions can be a competitive differentiator that lenders can use to offer more accurate pricing.
4. Greater Retain/Release Confidence
When lenders reach the point of choosing whether to retain or release servicing rights, live access to an experienced MSR broker is priceless. This readily available connection to precise values aids decision-making and affords lenders an accurate, solid number they can hang their hat on. Plus, it can help lenders dial in margins and observe a better duration profile on these assets when hedging.
5. Client-Specific Customization
MSR brokers can also tailor valuations to account for company-specific assumptions. This means lenders can have the real-time accuracy of broker-managed assumptions without sacrificing their own principles, such as financing structure, prepayments and delinquency performance, etc.
“Some lenders are hesitant to take this next step due to perceived expense or fear of the unknown,” said Mike Vough, managing director, Black Knight Secondary Marketing Technologies. “The fact is that when it comes to accurate and timely MSR valuation, you can’t afford not to use broker-managed assumptions in tandem with powerful technology. Retaining the wrong loan, for example, can cost a lender thousands of collars down the line due to increased servicing costs and advances.”
A recent study examined the impacts of converting a lender from grids to broker-managed assumptions. Findings showed that the value of servicing tightened to the MSR broker by approximately 5 basis points, while the internal rate of return from holding the asset increased by approximately 50 basis points. Incorporating broker-managed assumptions into your advanced cash flow model can help you make decisions like these more confidently with more accurate, consistent data.
“Leaving servicing grids behind in favor of a more granular approach may feel like a big step,” Vough continued. “And it is a big step – a big step in the right direction.”
Interested in fine-tuning your MSR valuation with innovative technology and real-time MSR broker data? Learn how Black Knight’s MSR Platform provides detailed visibility into the value and performance of servicing assets and market economics, with direct integrations to MSR brokers like PHOENIX.BACK