Optimize MSR ratings to improve decision making


Over the past year, the mortgage industry has seen an increase in issuance volume and a decrease in approved servicing bids. This has caused servicing portfolios to grow and become the largest single asset on many lenders’ balance sheets, making it crucial to keep an eye on the value of servicing rights.

Lenders reported significant issuance volume in the first quarter of 2021, but as interest rates change and the market shifts to a more buy-oriented issuing environment, lenders need to carefully monitor margins and profitability. If we have learned anything in the past year, it is that operational flexibility and accurate service assessment are the keys to lending profitability.

Historically, Mortgage Servicing Rights (MSR) were assessed once a month or once a quarter. With the recent increase in market volatility, lenders cannot afford to wait until the end of the month or quarter to understand what is happening to their servicing portfolios. Fortunately, thanks to advanced technology and the proliferation of APIs, lenders can now apply the same forms of daily reporting and metrics to their service rights as they do to their lending.

Recently, solutions have become available that allow lenders and service providers to approach pricing and portfolio management on multiple fronts. Businesses, from small credit unions to large mega-service providers, can benefit in a variety of ways from a detailed MSR assessment embedded in their day-to-day processes. With more accurate MSR ratings, originators can optimize pricing so that they can be competitive without leaving money on the table or being undersold for untimely MSR grids.

In addition, updating MSR values ​​more frequently and using them in pipeline analyzes can help lenders produce monthly or quarterly financial statements with a consistent MSR score throughout the process. Armed with this data, lenders can make smart decisions about whether to keep or sell the service, and introduce complete loan-level visibility into their portfolios.

Determination of MSR values ​​beyond the grid

Pricing asymmetry can cost lenders and service providers dearly. Lenders often receive a monthly or quarterly report from an MSR broker and use this simplified grid to determine the rating and decide whether to maintain or release future loans at any given time based on this grid.

“In the past, the industry has tried to reduce MSR using grids or simplified assumptions, but this approach can be far from accurate,” said Rob Kessel, managing director of Black Knight Secondary Marketing Technologies. “If you don’t understand the various parameters that determine service value, you’re not going to be pricing the credits properly and getting the production you actually want.”

The challenge with using networks is that most loans don’t fall straight onto the network line – they are somewhere in between. For example, if a grid breaks down the servicing adjustments in increments of $ 100,000, it doesn’t tell you exactly what happens to a $ 250,000 loan that falls between the tiers.

When a lender performs discounted cash flow with broker assumptions, the number of basis points in this gray area can vary between grid levels. If lenders only use grids and simplified assumptions, they could inaccurately price the loans or make poor hold / release decisions.

Maintaining the wrong credit can not only result in poor MSR ratings in the future, but also lock up money on possible advances or early buyouts. Servicers could theoretically overpay for a loan upfront and inadvertently capitalize on the asset at a different value than an MSR broker would value it in the future.

Increased accuracy with more granularity

There are several ways to solve the critical valuation dilemmas for lenders and service providers – each one starts by simplifying complex data and offering more granularity and transparency. Access to integrations with MSR brokers, daily MSR pipeline and portfolio reports, data and metrics can help lenders and service providers make smart decisions and stay competitive.

For example, Black Knight offers a suite of solutions that leverage Optimal Blue’s industry-leading product, pricing and eligibility engine and hedging capabilities, and CompassPoint’s risk management, loan sales platform and MSR rating analysis to determine more accurate service values.

Given the complexity and lending value sensitivity of an accurate calculation of the MSR rating, Black Knight’s MSR solution suite combines data directly from a user’s service system or pipeline data with assumptions from MSR brokers. Because brokers trade these assets directly, this direct connection with them is an essential part of providing up-to-date data with breakthrough market value accuracy.

“Better information earlier in the process increases financial performance and competitiveness,” said Kessel. “Leveraging broker assumptions and an advanced cash flow model can help lenders fine-tune the decision to keep or release.”

Service reps can now get a daily snapshot showing the effects of various milestones in the service relationship, be it a disbursement request or a deferral request. With complete transparency of service value, service reps can better understand the asset and value drivers and use the information to make more informed decisions.

Simplify complex data for key stakeholders

Managing service portfolios requires a wide range of data, analysis, and experience to make the best decisions. Lenders and service providers have different needs depending on the size of their portfolio, interests, and the role of the person reviewing the data. A tiered solution can help meet the specific needs of any business – with each tier providing more detail.

For example, executives often want a simplified view of the service portfolio data in a snapshot format. This data quickly shows why the asset’s valuation changed month-on-month, two months ago, and so on. The data is also broken down into a simplified summary level that shows portfolio performance and the interest rate environment at that point in time.

Black Knight offers its MSR Pulse solution, which provides a low-cost, daily report on portfolio valuation maintenance using general assumptions maintained by third-party branded providers. This solution is a popular choice for small credit unions and independent mortgage lenders (IMBs).

“Pulse is helping the senior executive team make the dashboard clearer, even for people who would not normally dive into the MSR assessment,” said Kessel. “It enables key stakeholders to get a bird’s-eye view of the critical factors affecting the financial health of their company.”

Use of detailed information at the credit level

As lenders expand their service portfolios over time, they often want more insight into choosing the right loans to service and how this will affect the performance of their pipeline. Not only do they want daily broker assumptions – they also want loan-level reports so they can get a better understanding of which loans are essentially going up and down in value on a daily basis. You want to be able to examine scenarios such as: B. what happens when payment defaults skyrocket, prepayments slow down or speed up, etc.

Secondary marketing departments also need to understand the servicing rating differences between high / low coupon executions, levels of excess servicing multiples, and between transfer types, as the different servicing ratings, in addition to retention / release decisions, determine the best execution decision.

Any originator who retains the service rights can use tools such as Black Knight’s MSR loan-level pipeline to conduct loan-level assessments for pipeline markings and make retention / release decisions. This solution uses service-specific assumptions and prepayment settings managed by built-in third-party MSR marking providers to provide the information lenders need to make the most accurate decisions possible.

Follow a practice-oriented modeling approach

Service providers who want to manage their MSR portfolio in a more hands-on manner but are not yet ready to manage their MSR assumptions can use tools such as Black Knight’s MSR portfolio. This solution provides a daily portfolio assessment at the credit level with specific assumptions from MSR brokers and is used by large service providers as part of their daily process. This includes daily MSR valuation assignment, eliminating surprises at the end of the month or quarter, and providing regular scenario analysis related to valuation performance in the face of future interest rate and economic changes.

Mega service providers with experienced MSR assessment staff who maintain their own assumptions and attitudes towards the prepayment model can go a step further by licensing analyzes through tools like MSR Pro. Servicers can leverage the same model used by most MSR brokers, but take over management of the model to do their own analysis. Your analysts can then tweak and modify the assumptions, do all the data mapping, and create scenarios, reports, and other custom tools.

Lenders and service providers looking to look at their entire business in a series of reports, or those looking to start investing, can do so with today’s advanced analytics solutions. In addition to providing transparency to internal stakeholders, these solutions make it easy to communicate financial data to the entire ecosystem of counterparties involved in lending and maintenance, including warehouse lenders, broker-dealers and agencies.

“All counterparties want to know that changes in economic conditions will not surprise the other party. Especially for lenders and servicers who have a significant part of their portfolio in the service sector, these solutions will enable them to better cope with changes in value, ”said Kessel. “The more servicers and senior managers understand what this asset is, the better prepared they are to make the best strategic decisions.”

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