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What Do 2023 Origination Trends Mean for MSRs?

When it comes to forecasting MSR performance and valuations, much is made of the interest rate environment, and rightly so. But other loan characteristics also play a role, particularly when it comes to predicting involuntary prepayments.

So let’s take a look at what 2023 mortgage originations might be telling us.

Average credit scores, which were markedly higher than normal during the pandemic years, have returned during the first part of 2023 to averages observed during the latter half of the 2010s.

FICO

The most credible explanation for this most recent reversion to the mean is the fact that the Covid years were accompanied by an historically strong refinance market. Refis traditionally have higher FICO scores than purchase mortgages, and this is apparent in the recent trend.

Purchase markets are also associated with higher average LTV ratios than are refi markets, which accounts for their sharp rise during the same period

LTV

Consequently, in 2023, with high home prices persisting despite extremely high interest rates, new first-time homebuyers with good credit continue to be approved for loans, but with higher LTV and DTI ratios.

DTI

Between rates and home prices,​​borrowers simply need to borrow more now than they would have just a few years ago to buy a comparable house. This is reflected not just in the average DTI and LTV, but also the average loan size (below) which, unsurprisingly, is trending higher as well.

Recent large increases to the conforming loan limit are clearly also contributing to the higher average loan size.

WOLS

What, then, do these origination trends mean for the MSR market?

The very high rates associated with newer originations clearly translate to higher risk of prepayments. We have seen significant spikes in actual speeds when rates have taken a leg down — even though the loans are still very new. FICO/LTV/DTI trends also potentially portend higher delinquencies down the line, which would negatively impact MSR valuations.

Nevertheless, today’s MSR trading market remains healthy, and demand is starting to catch up with the high supply as more money is being raised and put to work by investors in this space. Supply remains high due to the need for mortgage originators to monetize the value of MSR to balance out the impact from declining originations.

However, the nature of the MSR trade has evolved from the investor’s perspective. When rates were at historic lows for an extended period, the MSR trade was relatively straightforward as there was a broader secular rate play in motion. Now, however, bidders are scrutinizing available deals more closely — evaluating how speeds may differ from historical trends or from what the models would typically forecast.

These more granular reviews are necessarily beginning to focus on how much lower today’s already very low turnover speeds can actually go and the extent of lock-in effects for out-of-the-money loans at differing levels of negative refi incentive. Investors’ differing views on prepays across various pools in the market will often be the determining factor on who wins the bid.

Investor preference may also be driven by the diversity of an investor’s other holdings. Some investors are looking for steady yield on low-WAC MSRs that have very small prepayment risk while other investors are seeking the higher negative convexity risk of higher-WAC MSRs — for example, if their broader portfolio has very limited negative convexity risk.

In sum, investors have remained patient and selective — seeking opportunities that best fit their needs and preferences.

So what else do MSR holders need to focus on that may may impact MSR valuations going forward? 

The impact from changes in HPI is one key area of focus.

While year-over-year HPI remains positive nationally, servicers and other investors really need to look at housing values region by region. The real risk comes in the tails of local home price moves that are often divorced from national trends. 

For example, HPIs in Phoenix, Austin, and Boise (to name three particularly volatile MSAs) behaved quite differently from the nation as a whole as HPIs in these three areas in particular first got a boost from mass in-migration during the pandemic and have since come down to earth.

Geographic concentrations within MSR books will be a key driver of credit events. To that end, we are seeing clients beginning to examine their portfolio concentration as granularly as zipcode level. 

Declining home values will impact most MSR valuation models in two offsetting ways: slower refi speeds will result in higher MSR values, while the increase in defaults will push MSRs back downward. Of these two factors, the slower speeds typically take precedence. In today’s environment of slow speeds driven primarily by turnover, however, lower home prices are going to blunt the impact of speeds, leaving MSR values more exposed to the impact of higher defaults.


Sin Lee

sin-lee

Our Feature Spotlight
Sin Lee
Manager
 

The AAPI region is so large and diverse. We want to shine a light on the individual cultures of the region. Can you share a bit about yourself and your cultural heritage?
I was born in South Korea and came to the states when I was 13. Adapting to the new country and culture was challenging during my teenage years, but now having experienced both worlds, it has allowed me to appreciate the diversity this country has, my family and everything else around me. My heritage is Korean, and we still speak Korean in our home and I don’t foresee this will change in the future.
How did you find your way to RiskSpan?
I used to work at Wells Fargo Corporate Trust Services in the legacy RMBS. I wanted to explore different aspect of the MBS universe and challenge myself on different consulting projects with technical skills and critical thinking. When the opportunity came up, I followed through and I don’t regret my decision.
What is your Role at RiskSpan?
I am currently a Manager of one person team. This is my first year of being a manager, so there are a lot of new responsibilities to take. I hope to continue great relationship with our team going forward, so we can all cooperate and reach our goals.
How has your heritage shaped the person you are today?
My heritage, which is my parents shaped who I am today. During my teenage years, both of my parents were hard working blue-collar workers and I have never heard them complaining about the harsh situation they were in. They sacrificed everything they had to keep us educated and well-fed. Over the many years of seeing them, it has shaped me to appreciate everything that happens whether it’s good or bad. Of course there are bad days, but realizing they had gone through even worse situations, I appreciate where I am, who I am and move on.
Do you or your family have any traditions that are especially important to you?
One of the very important traditions is the Korean New Year. We bow down to our parents to receive words of wisdom and gather for rice cake soup. Eating the rice cake soup is a tradition to grant the people good luck for the year and gain one year of age. This soup is one of my favorite dishes.
What at RiskSpan do you find most interesting?
Work and People. Over the years I’ve spent at RiskSpan it was very interesting to see various products and services that RiskSpan offers and there are always valuable skills learned after each project. There were times when I struggled with certain projects, but I always found an opportunity to learn, and am grateful to work with very talented and intelligent team who are willing to help at all costs. Teamwork at RiskSpan works.
What does AAPI Heritage Month mean to you?
AAPI Heritage reminds me to recognize all the contributions and influences that people have given to these communities and country. We all have different culture, so it’s great to celebrate and cherish who we are.
This past year, there has been an exponential rise in hate-filled actions towards the Asian American and Pacific Islander community. What does showing up to support the AAPI community mean to you?
I never understood why someone would be so violent without any reason or just because they were AAPIs. It’s just not tolerable. I personally had encountered few situations when I was in middle school, just because I was Asian and couldn’t speak English. It may only be one fun moment for the offender but leaves an unerasable memory for the others. It is important to point out racism is wrong, so the world becomes a better place for everyone and future generations.
What would be your advise to young men and women from the AAPI community?
Take pride of who you are and celebrate the AAPI Heritage Month. It is a great time to look back where we’re from and appreciate prior generations because they have paved smooth paths for us to walk and run. Also we’re all living in the ‘Land of Opportunities’, so strive for the goals and live your life fully.


Dien Luu

dien-luu

Our Feature Spotlight
Dien Luu
Director, Consulting Services
 

The AAPI region is so large and diverse. We want to shine a light on the individual cultures of the region. Can you share a bit about yourself and your cultural heritage?
was born in Vietnam and came to the US when I was 7. I’m of Chinese and Vietnamese heritage, and various aspects of both cultures are part of who I am today, particularly an appreciation for family, community, and food!
How did you find your way to RiskSpan?
I had worked at Fannie Mae for over 20 years, in various roles and organizations, always looking for opportunities to enhance my technical skills and domain knowledge, solve problems, and grow professionally. My resume looks like that of a consultant and I been thinking about consulting for a while. When RiskSpan approached me with a consulting opportunity I jumped at it.
What is your Role at RiskSpan?
I’m a Director of Consulting, managing a team of four consultants who have projects at Fannie and Freddie. Besides the administrative stuff, a goal of mine is to help the team grow professionally in part by sharing my expertise and have regular meetings where the team members discuss what they’re working on, the challenges they’re facing, and we try to help each other with ideas and information. I also am engaged full time on a project with my client at Freddie.
How has your heritage shaped the person you are today?
I wouldn’t say these traits are exclusive to Chinese or Vietnamese culture, and they’re probably more directly attributable to my mother, but I do feel the connection to those two cultures my pride in my work, my sense of obligation to help the community succeed, whether it’s my project team or a wider community, and appreciation of diversity, of people, culture, ideas, and did I mention food?
Do you or your family have any traditions that are especially important to you?
We celebrate the Chinese (and Vietnamese) New Year by gathering at my mom’s for home-cooked dishes and giving red envelopes with money to the kids. The Mid-Autumn Festival is also observed by my family and includes having mooncakes and tea. As with all traditions, it’s really about being with the people you love.
What at RiskSpan do you find most interesting?
I think it’s great that RiskSpan offers a great product in its award-winning Edge Platform and also offers client services, both supported by deeply talented, knowledgeable, and experienced professionals.
What does AAPI Heritage Month mean to you?
Culture is part of who we are, and while we all share the values and traditions that are uniquely American, it’s also good to celebrate diversity and the things that are unique about each of us.
This past year, there has been an exponential rise in hate-filled actions towards the Asian American and Pacific Islander community. What does showing up to support the AAPI community mean to you?
I think speaking out about racist actions, words, or expressions, whether they’re micro-aggressions or are direct, and especially violent interactions, is important. We, all of us, need to point out racism when we see it and make it clear that it will not be tolerated and will be subject to consequences.
What would be your advise to young men and women from the AAPI community?
Revel and take pride in your AAPI heritage, and don’t let anyone, including yourself, other you. We are all Americans and should take advantage of the opportunities this great country offers to fully live, be ourselves, expect to be treated and appreciated like everyone else, and contribute to our communities and our country.

Thank you Dien!


Szymon Steczek

szymon-steczek

Our Feature Spotlight
Szymon Steczek
Model Validation Analyst
 

What does your role at RiskSpan entail?
As a model validation analyst, I work with clients to analyze the methodologies, assumptions, and limitations of various machine learning models.

I apply mathematical frameworks to enhance the business decision making process with data-driven metrics. I develop and implement predictive models and measure the effectiveness of existing business solutions using statistical tools and data visualization techniques.

How long have you been with RiskSpan?
10 months.
What 3 words best describe RiskSpan?
Growth, Trust, Innovation
What are your favorite hobbies?
Weightlifting during the week. Then on weekends, I enjoy taking spontaneous backpacking adventures and playing extreme sports.
What is one thing on your Bucket List?
Hop a cargo ship with a friend and “hitchhike” to Asia!
What do you like about RiskSpan’s culture?
I appreciate that I have been challenged since day one. Every project is a learning opportunity. Happy hours are fun, too, as is raiding the fridge throughout the day!
Which of the firm’s values resonate with you the most?
I’m pleased with the individual interest RiskSpan takes in each employee and in my development. If I have a different view on a topic, I know I can voice it. My supervisors are direct and supportive.
Which of the firm’s values resonate with you the most?
I proved to myself that a theoretical knowledge comes in very handy in the model validation area. It allows me to identify the mathematical weaknesses of the predictors and suggest the improvements that increase the robustness of the models. I’ve been exposed to a broad range of industry best practices; I learnt a lot about the most important machine learning algorithms and became a much better programmer. I was able to apply this knowledge to solve harder problems more optimally.


Peter Sanchez

Peter Sanchez

Our Feature Spotlight
Peter Sanchez
Client Relationship Management
“Peter is an indispensable contributor to RiskSpan’s sales team.”

How long have you been with RiskSpan?
A little more than a year and a half.
What does your role at RiskSpan entail?

As an analyst on the Client Relationship Management team, I work closely with RiskSpan’s clients to provide various solutions to short-term as well as long-term problems. In this role, I’ve contributed to both the data analytics and product management teams to analyze and develop these solutions. As part of my responsibilities, I am also at the forefront of the RiskSpan sales process. I meet with prospective clients and provide them with tailored introductions and demonstrations for their individual needs.

What 3 words best describe RiskSpan?

Innovative, nimble, determined

What are your favorite hobbies?

Board games, athletics, reading

What is one thing on your Bucket List?

To visit all 7 Continents

What do you like about RiskSpan’s culture?

RiskSpan’s culture of resilience to even the most complex of problems is inspiring. We are constantly creating innovative solutions to an ever-evolving financial space, never wavering to even the most daunting tasks.

Which of the firm’s values resonate with you the most?

RiskSpan’s approach to Diversity, Equity, and Inclusion has resonated me since I started with the company. Working closely with my mentor (another fantastic RiskSpan program) Christabel James, I’ve been apart of the DEI team since the beginning and value the conversations, ideas, and projects we’ve done to continuously strive to create an inclusive and diverse workplace where everyone feels respected and valued.

Describe how you’ve grown professionally since you started working at RiskSpan
RiskSpan encourages its employees to take on new challenges and stretch themselves. Through this encouragement, as well as the support and guidance offered along the way, I feel much better equipped to handle any complex issue that comes my way. That ability to problem-solve on the fly, is one I’ve most certainly honed and developed through my valuable working experience at RiskSpan. 


Maureen Runey

Our Feature Spotlight
Maureen Runey
Finance
“This month we recognize Maureen Runey, who all of you know because she does pretty much everything around here. But here are some things about Maureen that you might not have known:”

What does your role at RiskSpan entail?
My responsibilities for the company are handling HR processes such as managing Paycom, payroll, benefits, OpenAir, and Fidelity systems for enrolling and maintaining information about RiskSpan employees. I also handle invoicing, accounts payable and receivable functions, and company audits and I maintain the financial reporting for the company. 
What 3 words best describe RiskSpan?
Innovative, Exciting, and Challenging
What are your favorite hobbies?
All sports and boating
What is one thing on your Bucket List?
Go to England
What do you like about RiskSpan’s culture?
RiskSpan is always looking at how to move the company forward.
Which of the firm’s values resonate with you the most?
Innovative
Describe how you’ve grown professionally since you started working at RiskSpan
When I started 11 years ago, I mainly handled the bookkeeping side of the company and each year I have taken on more responsibilities which challenges me in a positive way. Every day is something different so I can never get bored with my job.
Thank you, Maureen. I don’t know how this place could possibly run without you!


Jack Ryan

jack-r

Our Feature Spotlight
Jack Ryan
Data Analyst
“There is an openness to new ideas that I really appreciate. From a development perspective, there is always a push to take advantage of new technologies and a willingness to listen to new perspectives.”

What does your role at RiskSpan entail?
I work on the product side with the development team and help to build new features and improve existing features the Edge Platform. I also support some of our larger client contracts which require more long-term and custom maintenance. I work alongside some of these clients that have custom requirements and help implement custom solutions based on their feedback. These custom solutions become permanent Edge Platform features when they are found to be relevant to other clients and prospective clients. A large part of my work has been related to ETL, enhancing our process for extracting and cleaning client data, enabling more client input and visibility to the ETL process and, more recently, streamlining our ETL process to facilitate a faster setup for future clients.

What 3 words best describe RiskSpan?
Dynamic. Enterprising. Pioneering.

What are your favorite hobbies?
I play guitar and bass and listen to lots of music. I’m a Liverpool FC, Ohio State football, and Washington Capitals fan and like to go to as many Caps games as I can.

What is one thing on your Bucket List?
See a Liverpool game at Anfield

What do you like about RiskSpan’s culture?
There is an openness to new ideas that I really appreciate. From a development perspective, there is always a push to take advantage of new technologies and a willingness to listen to new perspectives.

Which of the firm’s values resonate with you the most?
I like that RiskSpan is an inclusive space where everyone’s input is valued.

Describe how you’ve grown professionally since you started working at RiskSpan
At RiskSpan I have had the opportunity to work on nearly all stages of large analytics projects and deepen my understanding of what it takes to develop and maintain an enterprise analytics platform. I have been able to grow my abilities as both a software engineer and data analyst and learn new tools that are on the cutting edge of the industry.


Kriti Asrani

Our Feature Spotlight
Kriti Asrani
Data Analyst
“Kriti routinely earns high praise from clients. One recently observed that she “is truly transforming the capital forecasting process.”

This month, we spotlight Kriti Asrani, a talented data analyst who joined RiskSpan in May 2021.

Kriti routinely earns high praise from clients. One recently observed that she “is truly transforming the capital forecasting process.”

In addition to her outstanding client work, Kriti has given herself to social outreach, helping to spearhead RiskSpan’s inaugural event “Women Empowering Women.” Kriti also routinely meets with colleagues outside of work hours and is an advocate for the firm’s DEI initiatives.

Kriti has been instrumental in helping with new employee onboarding, going above and beyond to welcome new RiskSpan colleagues. She consistently lends her time to improving RiskSpan operations, creating job aids for new employees and building data processing pipelines using Apache Airflow and Snowflake. She has also been helping our firm develop a custom Hours Tracking utility that assists consulting professionals seeking to manage their working hours more efficiently.

We are delighted to have Kriti on our team!


Togo Traore

Our Feature Spotlight
Togo Traore
Manager
“My family. Honestly, knowing that people are counting on me, and have high hopes on me, motivates me to come to work and give my best every day.“

Tell us about your Role in RiskSpan and the team you work with.
“I am a Manager of Model Validation, and my day-to-day activities are writing proposals, reaching out to clients, new and former to propose services, and manage /oversee validation projects’ execution. I am in a team of 7, all with strong quantitative background and they all have at least a master’s degree. I report directly to the COO and Head of Consulting.”

What is most exciting about the work you do at RiskSpan?
“The most exciting thing about my work at RS is the exposure. I get to work with all size of banks and financial companies and all types of models.”

Togo Family

What does Black History Month mean to you?
“BHM means remembering people who have paved the way for us to be where we are today and to do more for the next generation. I am really proud to have obtained my master’s degree from Tuskegee University and experience the HBCU culture and feeling.”

Who is a person in black history that has shaped your professional career?
“A person in Black History that has shaped my life rather than my professional career is Nelson Mandela because of his courage, and determination to face challenges and change them.”

What motivates you to come to work each day?
“My family. Honestly, knowing that people are counting on me, and have high hopes on me, motivates me to come to work and give my best every day.“

What is something you love about your black culture/heritage and would like to share with your colleagues?
“For me it will be the Culture especially the authenticity of African Culture such as the clothing,dances, rituals and food.”

What is your favorite quote or mantra?
“My favorite quote is: “Pain is temporary. Quitting lasts forever.” By Lance Armstrong.”

What would be your advice to young black men wanting to join this industry?
I strongly encourage young black men to join the industry because it is rewarding. All they need is the right mindset and skills (quantitative skills such as data science, analytics and statistics). Also, I would encourage them to seek mentorship because it is very important.

Lastly, if you had a superpower, what would it be and what would you first use it for?
If I had one superpower it would be the one to stop all war and bring peace to the world.


Ibin Qawwee

Our Feature Spotlight
Ibin Qawwee
Corporate IT
“The most notable Greek minds came to Africa to be educated, and that the pyramids were so divinely constructed that they think aliens built them!”

Continuing with our Black History Month Celebrations, today we turn the spotlight on Ibin Qawwee!

Ibin is well known within the firm and if you are new to RiskSpan, he’s probably one of the first faces that welcomed you! Thank you Ibin for sharing your story, your motivations and perspectives!

Tell us about your Role in RiskSpan and the team you work with.
“I am part of the IT team. My role is focused on Corporate IT.”

What is most exciting about the work you do at RiskSpan?
“No two days are the same, and technology is evolving constantly.”

Ibin

What does Black History Month mean to you?
“Black History is American History and should be included in school curriculum, not celebrated for a month.”

Who is a person in black history that has shaped your professional career?
“I stand on the shoulders of all those before me who fought and were imprisoned, or worse, to ensure I would be afforded the same opportunities as the privileged people of this country.”

“I would like to highlight my family for shaping me into the person I am today. I had the advantage of being the youngest child, which gave me the unique opportunity to watch the struggles of my older siblings so I would not make the same mistakes.”

What motivates you to come to work each day?
“My motivation to work each day is knowing my value to my colleagues. I am a one-man team, so my best ability is availability.”

What is something you love about your black culture/heritage and would like to share with your colleagues?
“The most notable Greek minds came to Africa to be educated, and that the pyramids were so divinely constructed that they think aliens built them!”

What would be your advice to young black men wanting to join this industry?
“My advice to anyone considering IT would be to keep your skills current. This industry moves fast.”

If you had a superpower, what would it be and what would you first use it for?
“My superpower would be ‘Instant relaxation’. Anytime people get emotional or tense I would calm them down. Better outcomes are achieved when everyone has a clear mind.”

Lastly, what is your favorite quote or mantra?
“Greatness comes with adversity!”


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