Mortgage rates and rate indices continued their sharp decline during the last three weeks of December, closing the year with the lowest levels the market has seen since March, 2023. Mortgage rates managed to end the month lower than 11/30/2023 levels by about 66 basis points, while float income rates managed to drop about 40-50 basis points below 11/30/2023 levels. Combined mortgage rates decrease during the months of November and December exceeded 100 bps, and float income rate decline exceeded 75 bps during the same period. Such a material decline in rates does have a negative impact on the overall MSR portfolio values, due to sensitivity to rates downtrend risk.
All of 2023 production will experience the hardest value depreciation than other vintages. As 2020 production enters its fourth year of seasoning and with significant equity build up with those underlying properties, combined with record consumer debt levels and increasing HELOC and second mortgage production, current mortgage rates may tip the borrowers hand and motivate more to opt to refinance their low interest rate loans for debt consolidation purposes.
MSR value “at risk” is a measure of the market risk that could have a negative impact on MSR values; There are multiple underlying portfolio risks that are primarily driven by mortgage rates and borrowers’ behavior, which MSR holders should monitor. Borrowers’ current FICO and debt to income risk levels should be monitored closely, as well as MSR portfolio interest rate distribution. Most of prepayments experienced in 2023 were from vintages prior to 2020, however, the industry could experience elevated prepayments within 2020-2022 vintages as borrowers may take advantage if rates continue their declines and reach about 6.00% - 6.25%. Current mortgage rates, combined with borrowers’ high debt and high underlying property values combined attributes could create pressure on MSR values. MSR value at risk is a reality that companies must plan and prepare for in order to offset potential and inevitable MSR value retractions.
Market values for existing MSR portfolios continue to show slight weaknesses across the board, however, they remain relatively attractive for many MSR investors. As we enter a new year, the industry expects robust bulk MSR trading activity during Q1. The challenge would be navigating current mortgage rate environment. Current MSR market values are fairly in line with current fair value levels, within five (5) basis points.
As of December 31, 2023, the current 30 Year base mortgage rate is 6.394%, which represents about a 66 basis points decrease from their November 30 mark. We anticipate existing portfolio fair values to decline from their 11/30/2023 marks in the range of about 3-6 basis points, depending on underlying portfolio characteristics. While overall values should remain strong, all of 2023 vintage will reflect the largest value depreciation when compared to other vintages. However, 2020-2022 production is expected to show value retractions in the range of 2-4 bps, depending on loans characteristics.
While MSR fair values in basis points remain steady and strong, MSR dollar values are eroding due to the fact that 2020 -2022 production have very low interest rates, therefore, as borrowers make their regular payments, the natural principal payments make up approximately 40-60% of total principal balance runoff which includes portfolio payoffs. Most lenders are currently retaining only about 20%-30% of their production which barely covers the principal balance that ran off. This is the primary driver that is causing the dollar value of portfolios to continue to decline while the basis points values remain level.
For portfolios that have a mix of Conventional and Government loans, we anticipate Fair Value changes as follows:
- Conventional loans between -2 to -5 bps change from November 30, 2023 marks.
- Government loans between -3 to -7 bps change from November 30, 2023 marks.
- GNMA loans are experiencing a continuous uptick in delinquency rates which generally began in Q2, 2022. Due to the increase in delinquencies, we are currently monitoring those trends and are consequently more cautious with our GNMA fair value estimates at this time.
Reach out to the MCT MSR team with any questions!
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