Earlier this week, RiskSpan hosted a webinar featuring a panel of experts who provided a comprehensive look at the current state of the mortgage market, with a particular focus on mortgage servicing rights (MSRs), market analytics, and risk management strategies. Featuring commentary from Michael Fratantoni, Chief Economist of the Mortgage Bankers Association, alongside Geoffrey Sharp of Eris Innovations and RiskSpan’s Dan Fleischman and Chris Kennedy, the event offered a timely and in-depth discussion on the evolving challenges and opportunities confronting bulk traders in the MSR space.

Register here to listen to the full webinar recording.

Economic Outlook: Slowdown in Sight

Mike Fratantoni’s introductory message was clear: the U.S. economy is showing signs of deceleration, and that slowdown is being felt acutely in the housing and mortgage sectors.

Fratantoni highlighted that inflation, while trending downward, remains a key concern. Mortgage rates, elevated through much of 2024, have shown some easing in recent months but remain a barrier to both home purchases and refinancing activity. He pointed to a growing recognition that the global and U.S. economies are slowing — and an increasing risk they could slow more than expected.

This economic climate has direct implications for mortgage originators and servicers. Origination volumes have been suppressed due to affordability challenges and low housing inventory. Meanwhile, servicers are navigating increased costs and evolving regulatory expectations, making effective risk management more important than ever.

Dan Fleischman and Chris Kennedy then dove more deeply into the MSR market. Despite market headwinds, investor appetite for MSRs remains robust, largely driven by the asset’s countercyclical appeal and attractive risk-adjusted returns.

Kennedy explained that bulk MSR trading is still quite active, with some notable dislocation between bid and ask prices depending on loan characteristics and servicing costs. He also emphasized the importance of data quality in navigating this market, especially given the divergence in GSE prepayment behavior and the wide range of models being used to value servicing portfolios.

Fleischman expanded on the analytics side, walking through how servicers are increasingly relying on machine learning and historical GSE data to refine valuation and hedging strategies. “There’s a clear shift towards more granular modeling,” he noted, “not just at the loan level, but factoring in behavioral differences by servicer, geography, and even sub-servicer.”

Interest Rate Risk: Zero Swaps as a Hedging Tool

Geoff Sharp of Eris Innovations focused on how MSR investors are using Eris SOFR swap futures to manage interest rate exposure. As interest rates remain volatile, the duration and convexity risk associated with MSRs has become harder to hedge using traditional instruments.

“Zero swaps give investors a cleaner, more precise hedge,” Sharp explained. Unlike standard interest rate swaps, which exchange floating for fixed payments, zero-coupon swaps strip out the coupon and focus purely on duration. This allows for tighter alignment with MSR portfolio sensitivities, especially in high-rate environments where convexity matters.

Sharp also emphasized that the adoption of these instruments is no longer limited to the largest institutional players. “We’re seeing more mid-sized servicers look into this,” he said, “because the volatility has made traditional hedges more expensive and less effective.”

GSE Behavior and Prepayment Models: The Devil in the Data

Panelists frequently came back to the complexity of modeling prepayments in today’s market. With refinance incentives mostly absent, borrower behavior is increasingly driven by non-rate factors like relocation, cash-out needs, and credit events.

Dan Fleischman noted a recent shift in GSE delivery data that is reshaping how investors think about prepay risk. “We’re seeing very different prepayment speeds by seller and servicer,” he said. “Some of that is a function of portfolio composition, but some of it is clearly behavioral or operational.”

RiskSpan has been at the forefront of efforts to normalize and benchmark this data, providing servicers with a clearer picture of how their MSR assets may perform relative to the market. The panel stressed that accurate, up-to-date GSE data is critical not just for pricing MSRs, but also for identifying outliers and opportunities in both acquisition and sale.

Regulatory and Operational Considerations

In the final portion of the webinar, panelists discussed the regulatory and operational realities facing servicers in 2025. Compliance costs continue to rise, driven by both federal scrutiny and investor expectations around data security, customer experience, and portfolio transparency.

Chris Kennedy underscored the importance of operational efficiency, especially as revenue margins tighten. “Servicers are having to do more with less,” he said, “which means automation, smart analytics, and scalable infrastructure are no longer optional — they’re table stakes.”

There was also discussion around how MSR buyers are performing increasingly detailed diligence, not only on loan-level characteristics but on the servicing platform itself. Buyers want to understand call center metrics, delinquency management strategies, and borrower retention initiatives before committing capital.

What we learned

Here are some of what we consider to be the webinar’s key takeaways:

  • Economic Softness: A slowing economy is constraining origination volume, but the MSR asset remains a bright spot due to stable cash flows and defensive qualities.
  • Evolving Analytics: Servicers and investors are leveraging advanced analytics and GSE data to improve pricing, risk assessment, and benchmarking.
  • Hedging Innovation: Tools like zero-coupon swaps are gaining traction as more precise instruments for managing rate risk.
  • Behavioral Complexity: Modeling prepayments is harder than ever, requiring sophisticated data approaches and continuous recalibration.
  • Operational Readiness: In a tighter margin environment, servicers must optimize platforms to remain competitive and compliant.

The mortgage servicing world is not immune to the broader economic uncertainty, but for those with the right tools, data, and discipline, the MSR space still presents compelling opportunities. Success in today’s market requires a mix of macro awareness, micro-level analytics, and a relentless focus on operational performance.

Contact us to discuss, learn more, or get a free demo or trial of RiskSpan’s award-winning MSR solution.