MReport October 2018

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56 | TH E M R EP O RT SERVICING THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T The Drivers of Greater Mortgage Risk The National Mortgage Risk Index reached a series high this summer, driven by three key factors. M ortgage risk jumped in April, setting a new series high according to the quarterly National Mortgage Risk Index (NMRI) released by the American Enterprise Institute's (AEI) Center on Housing Markets and Finance at the end of July. The rise in risk was primarily driven by agencies further loosening leverage to maintain levels of mortgage activity. The quarterly index monitors market stability through real-time tracking of leverage and is set up like a stress test that places loans in risk buckets and assesses default risk based on the perfor - mance of 2007 vintage loans with similar characteristics. The AEI has said that three key drivers are pushing mort - gages towards greater risk. First, a greater availability of income leverage that is allowing bor- rowers to compensate for master home-price appreciation; second, a shift towards lower down pay- ment loans; and third, a greater presence of cash-out refis as tap- pable equity increases. According to the data released by AEI, the April refinance NMRI set an all-time series high driven by a leap in the cash-out index. "With the national seller's market now in its 70th month, this additional leverage is be - ing absorbed into higher house prices," the report said. "The multiyear surge in home prices, particularly for entry-level homebuyers continues unabated and is fueled by high-risk mort - gages guaranteed by taxpayers," noted Edward Pinto, Co-Director of the AEI's Center on Housing Markets and Finance. "We see no halt to this trend so long as FHA, the GSEs, and the VA continue offering easy mortgage credit terms which keep demand well more than supply." The report also indicated a considerable spread of default rates across risk buckets, with borrowers who had a credit score between 620 and 689 falling in the high- to very high-risk buckets. Borrowers in this credit score range were likely to have a default rate between 22.7 percent and 45.8 percent, the report indicated. For purchase loans, the NMRI found credit easing continued with the composite NMRI for purchase loans jumping 0.5 points from its elevated levels a year ago. The first-time buyer index rose 0.6 points on increases in FHA loans. AEI said the rising prices had a disparate impact on buyers, benefiting repeat buyers through price appreciation and hurting first-time buyers who had to take on more leverage. "Leverage matters for house prices," said Tobias Peter, Senior Research Analyst at AEI's Center on Housing Markets and Finance. "The greater availability of plain- vanilla leverage for lower-income borrowers during the current seller's market has inflated a house-price boom that is most prevalent at the lower end of the price spectrum." MSR Values Rise with Increasing Rates While interest rates rise, likelihoods of prepayments drop, pushing up MSR values. T he value of residential mortgage servicing rights (MSRs) rose in July due to an increase in rates and lower expectations with respect to prepays, according to MountainView Financial Solutions. During an August webinar giv - ing the monthly snapshot of MSR performance in July, Mike Riley, Managing Director, Analytics at Mountainview, said an increase of 9-10 basis points in rates had led to an impact on mortgages, es - pecially in terms of value change attribution. The webinar gave insights on managing, valuing, acquiring, and selling residential MSRs and discussed the interest-rate environ - ment, MSR risk management, MSR pricing levels, and MSR market activity in July. Speaking on the pricing of MSRs, Mark Garland, Managing Director, Analytics, MountainView Financial Solutions, said the company was seeing a strong impact by state on new product pricing in relation to escrows. "We are seeing different levels of interest on escrows, different incidents of loans escrowed versus those waived, and a difference in escrow cushions across states," Garland said. Depending upon projected bal - ances by mortgage bankers who account for escrow custodial float, float rates, and interest on escrow rates, the impact on MSR values relative to escrows was between seven and 17 basis points in July. When it comes to the correla - tion between prepayment speeds and low FICO products, Garland said MountainView found the prepayment times for low-FICO conventional and low-FICO gov - ernment products were similar. "We took a wide array of products to see what a con- ventional product prepayment looks like across different FICO bands and compared that with low-FICO government products in similar bands," Garland said. "We saw that there was really no significant difference in prepay - ment speeds." When looking at the conven- tional mortgage products with primary rates between 4.25 per- cent and 4.49 percent, the study found that in July, prepayments for FICO scores ranging between 660-679, 680-710, and more than 720 were about the same at a little over 10 percent. When the rates rose slightly to 4.5 percent and 4.74 percent, the prepayment speed for FICO scores in the range of 660 and 679 rose to around 14 percent. However, the prepayment speeds for mortgages with FICO scores ranging between 680 and 710 and more than 720 remained at a little over 12 percent. The study found a similar correlation between FICO scores and prepayment of government mortgage loans. At a mortgage rate between 4 percent and 4.24 percent, it revealed that prepayment speeds of borrowers with FICO scores ranging between 620 and 639 and 640 and 659 were a little over 14 percent. For borrowers with scores of 660-679 and 680-710, the prepayment speed was a little over 12 percent. However, when mortgage rates increased to between 4.25 percent and 4.49 percent, the prepayment speed for borrowers with scores of 620-639, 640-659, and 660-679 were uniform at a little over 16 percent. However, the prepayment speed for those with scores in the range of 680-710 remained at 14 percent.

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