Prepayment risk fell to nearly a 22-year low in September

Mortgage prepayments fell to their lowest point since November 2000 last month, reducing one of the biggest risks for servicing investors, a Black Knight report published Friday shows.

The single-month mortality rate dropped to 0.57% in September, according to the company’s first take on data from the period.  The number highlights what’s generally thought of as an upside for mortgage servicing values. However, its impact has been complicated by other factors at play in the current market, including shifting monetary-policy signals that have affected interest rates and raised some concerns about the economy.

Other considerations buyers may weigh include extension risk related to the fact that, if rates keep rising, the value of recently purchased rights to borrower payments might not be as attractive as the next package of MSRs trading. 

And whether or not rates do keep rising depends on a lot of factors that are difficult to gauge even with federal monetary policy officials in the United States doing their best to keep the market apprised on their plans, said Les Parker, a managing director at Transformational Mortgage Solutions. 

“You have high volatility, coupled with high uncertainties surrounding a number of things in the global economy as well as in the domestic economy,” Parker noted.

Also, as much as fewer prepayments reduce the likelihood that MSR cash-flows will run off if the related loan is refinanced by a new lender, they can reduce a buyer’s opportunities to potentially do repeat business with the borrowers in those servicing portfolios they purchase.

“Rapidly rising rates and their impact on prepayment activity has also increased the expected duration of those loans originated in the record low rate environment of 2020/2021 and prior, which places a premium on the market value of such mortgages along with their servicing rights,” said Andy Walden, vice president of enterprise research at Black Knight. “On the other hand, modeling that expected duration and market value for more recent originations is incredibly difficult given as much rate volatility as we’ve seen and with 30-year offerings nearing 7%.”

The mortgage servicing rights market has remained active this month despite these contravening trends, with a few multibillion-dollar packages tied to government-sponsored enterprise loans in the market. Plus some deals related to loans in securitizations backed by Ginnie Mae are being offered as well. 

The MSR market remains robust, but bids aren’t as strong as they were in March and April of this year, said Tom Piercy, president of national enterprise business development at Incenter LLC. 

“While rates have increased significantly, so has concern over long-term impact to the economy and borrowers’ ability to pay,”  Piercy said.

Incenter has put at least three bulk deals in the first category out for bid in October. It also had a role in marketing at least one smaller Ginnie Mae transaction totaling nearly $468 million.

“Response has been right in line with expectations, with a relatively high number of bidders for each deal and pricing right in line with targets,” said Piercy, who also is managing director of his company’s capital markets trading and valuation subsidiary, Incenter Mortgage Advisors.

Regardless of product type, prepayments for legacy loans, which primarily reflect 2020 and 2021 originations, have hit a “soft floor,” said Mike Carnes, a managing director at MIAC.

“Rates rose so much so fast that even a lot of the ’22 originations are now 200 basis points or more out of the money and experiencing rather sticky prepayment speeds,” Carnes said. “Basically, it would take a big rate move to dramatically influence prepay speeds for legacy MSRs today.”

Buyers in the market have generally been paying more than four and nearly five times the purchase price expressed as a percentage of the loans’ unpaid principal balance, divided by the servicing fee for GSE packages, according to Piercy. Ginnie Mae MSRs typically have traded in the “mid 3s,” he added.

Ginnie MSRs generally have been trading in back of Fannie Mae/Freddie Mae equivalents, but also some speculation has arisen that a pending and controversial capital requirement affecting only the former market could put some additional downward pressure on pricing in the future.

A recent delay of that rule’s implementation until the end of 2024 is expected to diminish that risk for the time being, but it remains possible that “the punitive treatment of mortgage servicing rights could result in reduced liquidity of MSRs and could limit lenders’ ability to serve borrowers in the Ginnie Mae servicing space,” MBA President and CEO Bob Broekmit said in a press statement.

Deals with MSRs associated with securitizations Ginnie guarantees and other government agencies back include one $2.44 billion portfolio that also contains Fannie/Freddie loans and has a 5.82% weighted average delinquency rate, according to the Mortgage Industry Advisory Corp. The weighted average loan age for the package, which has a bid deadline on Oct. 27, is 12 months.

While delinquencies on the loans in Ginnie Mae securitizations tend to be higher than in other parts of the market, generally they’re still historically low, according to Black Knight. 

The rate at which loans overall were delinquent, but not in foreclosure, during September was 2.78%, down 0.18% from the previous month, and just 3 basis points above a record low recorded in May.

Both foreclosure starts and delinquency rates have gotten higher than a year earlier as pandemic-related relief that temporarily restrained them have been rolled back, but they’ve fluctuated on a monthly basis. September’s foreclosure starts fell 9% from August.

While a lot of generalizations can be made about MSR packages based on national performance or prepayment numbers, each can be very unique for reasons that include regional differences and housing turnover rates, said Parker.

“There’s a huge obstacle to refinancing in New York,” Parker said, citing one example.

Multiple regional packages are coming to market in the next couple weeks, through Prestwick, another broker. Upcoming offerings by their sizes, regional concentrations, product mixes and bid deadlines include: $512 million (Northeast, Ginnie Mae, Oct. 27), $402 million (Florida/Georgia, Fannie/Ginnie, Oct. 28), and  $140 million (Maryland/Virginia, Fannie/Freddie, Nov. 2).