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Advantages of Real-Time MSR Data and the Impact on MSR Valuations

Blog By

Mike Vough

With the run up in servicing valuations and portfolio sizes in the wake of the COVID-19 crisis, a new level of scrutiny is warranted on mortgage servicing rights (MSR) portfolios. The industry is accustomed to reviewing pipelines daily for profitability, risk exposure and data integrity, but MSR portfolios are not reviewed with the same level of rigor. Why’s this the case?

Historically, MSR portfolios have been valued either on a monthly or quarterly basis. The main reason for this cadence is because loan data was traditionally only updated at those intervals. This became the industry norm for several reasons. To start, borrowers typically make payments once a month. There’s also little volatility in the value in servicing and many individuals don’t understand the asset. And finally, the number of MSR hedgers is very small.

However, a large percentage of the net worth and balance sheet of a lender is tied directly to MSR valuation, especially with originations at multi-year lows. In this current rate environment, where origination costs are skyrocketing and lenders are fighting for every loan, can you afford an unexpected valuation change, a large principal and interest advance, or an impairment? A new level of scrutiny and cadence are needed to manage the MSR portfolio in real time.

The combination of two industry mainstay technologies allows lenders to get a better feel for what’s arguably their largest asset. The industry-leading Black Knight MSP® loan servicing system is used to manage numerous activities throughout the servicing life cycle, including payment processing, escrow administration, default management and much more. Optimal Blue, a division of Black Knight, also offers the CompassPoint MSR valuation engine, which is used by a majority of the MSR broker community. This platform is used to value the bulk of all servicing rights in the industry annually.

An integration between these two technologies allows users to bring that daily valuation or pipeline mentality to their MSR portfolios. Data from MSP inclusive of all servicing activity from the previous day is transmitted directly to the CompassPoint MSR valuation engine. The result? Lenders receive a daily line of sight into their MSR portfolios without having to do a thing.

With a daily cadence of review and exposure to their MSR portfolios, lenders can start to exercise the muscles that are already tried and true on the pipeline side. This includes considering the component parts of the swings in daily G/L, data points that are critical to risk management and repeatable events that lead to G/L changes.

Daily MSR portfolio reviews with up-to-date data and updated valuations can lead to some of the following findings:

  • MSR hedge performance – Lenders have seen a big appreciation in value of their servicing portfolios in the last two years, and more and more are considering hedging their MSR portfolios. Having a daily cadence with a daily MSR valuation controlled by MSR brokers is a must to stay ahead of today’s volatile market.
  • Delinquency and foreclosure valuation impact – The impact on valuation can be felt immediately on the day a loan goes delinquent or into foreclosure.
  • The impact of today’s rates – With today’s volatile rate market, can you truly wait to see the impact on your MSR portfolio until month-end, let alone quarter-end? Daily visibility gives lenders the ability to see how much of their portfolio is susceptible to a potential refinance, which loans may or may not need to be hedged, and loans that can be possible recapture opportunities.
  • Payoffs treated like fall out – The day a loan is paid off, or the day notice is given that a loan will pay off, the loan will fall out of the MSR portfolio. This will lead to an updated MSR portfolio size, valuation and duration.
  • Cash needs for potential advances – With government assistance on forbearance behind us, lenders need to have a handle on the potential advances that they can be on the hook for if delinquencies increase from today’s level.
  • Float income? – For years, the income earned on float from principal and interest and taxes and insurance was not considered or monitored due to the low level of rates. With the large increase in rates in 2023, float makes up a considerable part of the MSR valuation. Even loans that are not in danger of a refinance may still need to be hedged to account for the market move impacts on float.
  • Retained or released strategy – Cash is king in today’s mortgage banking environment. While many have a retained-only business model, there are still others that make decisions to retain versus release based on the premium or discount that the secondary markets are paying for the MSR asset. Therefore, it is critical to have current market valuations versus economic valuations in real time. This will allow an originator to deploy cash in the most effective way possible.

Reviewing the MSR portfolio daily leads to more ownership and experience with MSR assets. With this increased cadence of review, lenders can use this additional data to make more strategic decisions. This includes hedging strategies and margin decisions with an increased view into broker, channel and loan officer prepayment profiles. It can also lead to better cash management, including advance projections, better “what if” scenario analytics and more. In the current rate environment, lenders deserve tools that help facilitate advanced strategic decisioning, and increasing the cadence of MSR data flow with MSP and the CompassPoint MSR valuation engine does just that.

If you’re interested in gaining more visibility into your MSR portfolio, contact Optimal Blue today.