SOMB 2 - Servicing Portfolio Valuation
What is Servicing - ANS-the contractual right to receive mortgage payments from
mortgagors for a fee, and remit pieces of those payments (Principal, interest, taxes and
insurance) to the appropriate recipients
Components of a mortgage payment for a borrower - ANS-Principal, interest, taxes &
insurance
Components of a mortgage payment for a servicer - ANS-1. Taxes & Insurance -> go to
counties
2.a Interest portion -> collect service fee (0.25%) & guarantee fee (0.50%)
2.b interest portion -> after fees are collected, remaining goes to investor
3. Principal -> goes to investor
** the amount of principal and interest is a pass-through emitted to the owner/investor
for the loan
What is a MSR? - ANS-1. the contractual obligations undertake by one party to provide
servicing for mortgage loans owned by another party, typically for a fee
2. The strip of interest from the loan. Based on the accounting rules, it becomes an
asset when a mortgage loan is sold SERVICING-RETAINED
Servicing investment alternatives (see risk chart on slide 14) - ANS-1. Selling service
released (Low operational risk & low financial risk)
2. Passive servicer (low operational risk & high financial risk)
3. Sub-servicer (high operational risk & low financial risk)
4. Traditional servicer (high operational & high financial risk)
When is the MSR recognized as an asset? - ANS-When the loan is SOLD (slide 34). If
the loan is not sold, the originator will hold ALL of the interest; no servicing fee is
extracted.
Two types of MSR Accounting - ANS-1) Fair Value - mark to market through income
statement. Due to volatility likely to hedge the mSR asset.
2) LOCOM (lower cost or market) - Record at fair value, amortize and test for
impairment. Impairment occurs when market value is less than book value. Less volatile
that fair value but impairment charges can be material and sudden.
, ** both require initial recognition of MSRs at fair value
MSR Valuation % - ANS-MSR value % = MSR $ value / MSR UPB
Weighted averages - ANS-1) WAOT - Original Term (ex: 360)
2) WAA - Age (ex: 12 years)
3) WAM (gross) - Remaining Maturity (348)
4) WART (prepayment adj.) - Remaining Term (78)
5) WAC - Coupon (4.00)
6) WASF - Servicing Fee (0.25)
7) Duration - Economic Value (48
What is servicing value? - ANS-NPV of the revenue streams generated by a servicing
portfolio
MINUS (-)
the operating expenses to administer it
ADJUSTED FOR
the call option given the mortgagor by virtue of his/her right to prepay at will.
Expression of servicing value - ANS-1) Multiple of the servicing fee. Multiple brings the
value of time into the equation. Multiple = years
2) Percentage of the UPB (MSR value / UPB amount)
How to calculate multiple - ANS-BPS Value / WASF (weighted average servicing fees)
EX: 100 bps / 25 WASF
MSR valuation approaches - ANS-1) Static Approach
2) OAS Approach
Static Approach - ANS-Assumptions used are the same for all cash flow periods;
assumes "the word does not change". Requires less of a tech investment and the
results are easier to understand.
Tends to be used by non top 20 servicers, and companies that do not hedge MSR risk.
What is Servicing - ANS-the contractual right to receive mortgage payments from
mortgagors for a fee, and remit pieces of those payments (Principal, interest, taxes and
insurance) to the appropriate recipients
Components of a mortgage payment for a borrower - ANS-Principal, interest, taxes &
insurance
Components of a mortgage payment for a servicer - ANS-1. Taxes & Insurance -> go to
counties
2.a Interest portion -> collect service fee (0.25%) & guarantee fee (0.50%)
2.b interest portion -> after fees are collected, remaining goes to investor
3. Principal -> goes to investor
** the amount of principal and interest is a pass-through emitted to the owner/investor
for the loan
What is a MSR? - ANS-1. the contractual obligations undertake by one party to provide
servicing for mortgage loans owned by another party, typically for a fee
2. The strip of interest from the loan. Based on the accounting rules, it becomes an
asset when a mortgage loan is sold SERVICING-RETAINED
Servicing investment alternatives (see risk chart on slide 14) - ANS-1. Selling service
released (Low operational risk & low financial risk)
2. Passive servicer (low operational risk & high financial risk)
3. Sub-servicer (high operational risk & low financial risk)
4. Traditional servicer (high operational & high financial risk)
When is the MSR recognized as an asset? - ANS-When the loan is SOLD (slide 34). If
the loan is not sold, the originator will hold ALL of the interest; no servicing fee is
extracted.
Two types of MSR Accounting - ANS-1) Fair Value - mark to market through income
statement. Due to volatility likely to hedge the mSR asset.
2) LOCOM (lower cost or market) - Record at fair value, amortize and test for
impairment. Impairment occurs when market value is less than book value. Less volatile
that fair value but impairment charges can be material and sudden.
, ** both require initial recognition of MSRs at fair value
MSR Valuation % - ANS-MSR value % = MSR $ value / MSR UPB
Weighted averages - ANS-1) WAOT - Original Term (ex: 360)
2) WAA - Age (ex: 12 years)
3) WAM (gross) - Remaining Maturity (348)
4) WART (prepayment adj.) - Remaining Term (78)
5) WAC - Coupon (4.00)
6) WASF - Servicing Fee (0.25)
7) Duration - Economic Value (48
What is servicing value? - ANS-NPV of the revenue streams generated by a servicing
portfolio
MINUS (-)
the operating expenses to administer it
ADJUSTED FOR
the call option given the mortgagor by virtue of his/her right to prepay at will.
Expression of servicing value - ANS-1) Multiple of the servicing fee. Multiple brings the
value of time into the equation. Multiple = years
2) Percentage of the UPB (MSR value / UPB amount)
How to calculate multiple - ANS-BPS Value / WASF (weighted average servicing fees)
EX: 100 bps / 25 WASF
MSR valuation approaches - ANS-1) Static Approach
2) OAS Approach
Static Approach - ANS-Assumptions used are the same for all cash flow periods;
assumes "the word does not change". Requires less of a tech investment and the
results are easier to understand.
Tends to be used by non top 20 servicers, and companies that do not hedge MSR risk.
