The long-term rate drop in anticipation of the latest Federal Open Market Committee has affected servicing, but since the confirmation of a 25 basis point FOMC cut has stabilized financing costs the impact currently appears limited on a go-forward basis.
"Servicers should expect a pickup in refinances as there are a significant number of households with mortgages over 6.75% which are in-the-money purely from a rate perspective," said
Since the predominant 30-year fixed rate for home loans
"I was pleased to see the Fed cut only at a quarter of a point for clients who hold MSRs because they're already going to be impacted by the drop that we've seen previously and would not feel anything further," said Tom Piercy, head of
While future mortgage rate declines could gradually occur given the current forecast for the Fed to keep loosening monetary policy incrementally, the current trajectory is anticipated to have a limited impact on MSR values for multiple reasons.
"I think the market got ahead of itself in mortgage land," Duncan said. "There was so much focus on employment recently that inflation, deficits and debt left the screen. Those issues returned to the scene backing rates up a bit as seen by the 10-year treasury yield increase. The Fed put cuts in October and December in play but for that to drive mortgage rates down will require progress on the inflation front."
Segmentation in the servicing market
A lot of mortgage servicing rights from the pandemic era have weighted average coupons or rates that current financing costs would have to drop exceptionally far to impact from a prepayment perspective. Higher-rate MSRs are a different story, according to Mike Carnes, managing director of the MSR Valuation Group at MIAC.
"Lower-WAC MSRs retain some insulation given their limited refinance incentive, so the primary impact there comes from reduced float earnings," he said. "Higher-WAC MSRs, on the other hand, are being hit harder, with both elevated prepayment expectations and lower float income pressuring values. That said, this is also where recapture opportunities are most meaningful."
As far as the Ginnie Mae market for more credit-sensitive loans compared to the GSE market, Piercy said both types of MSRs have been sought after in part because the efficiencies involved in refinancing for Federal Housing Administration insured and Department of Veterans Affairs interest-rate reduction refinance loans.
"Ginnie Mae MSRs are still trading and in tremendous demand even though we're seeing delinquencies continue to trend higher. But in the Ginnie Mae world, both the VA IRRRL and the FHA streamlined refinance makes it considerably easier to refinance a mortgage than it is in the conventional world. So you'll see recapture rates significantly higher," he said.
While Ginnie delinquencies have been higher, Duncan said the most recent indicators have pointed to an economy that is relatively strong despite several policy uncertainties and signs of weakness of private sector employment.
"The core of the economy seems to be performing reasonably," he said.
