Leveraging Pool-Specific Performance and Recapture Analysis: A Game Changer for MSR Investors
Successfully forecasting MSR cash flows demands a level of precision and granularity in data analysis that few other asset classes require. This is especially true for investors seeking to estimate how much prepayment runoff they can reasonably expect to recapture, which is key to the performance of the asset. And often investors need to measure that performance by the specific pools of MSRs they purchase — as each pool may have its own unique recapture arrangements.
RiskSpan’s Edge Platform has incorporated a robust framework for managing MSR investment performance by enabling investors to track pool-specific performance and recapture analyses, thus obtaining a more nuanced understanding of their portfolios. In this post, we delve into some of the specific challenges MSRs pose, the benefits of transaction-specific segmentation, and the unique capabilities of RiskSpan’s Edge Platform.
Understanding Pool-Specific Performance
Owning MSRs requires investors to track the performance of various loan pools over time. For example, an investor may purchase an MSR pool and rely on a sub-servicer to service the loans as well as make efforts to recapture borrowers that are looking to refinance. It is important for the investor to understand and track the returns on that pool which may be largely driven by recapture efficiency.
While performance needs to be monitored on a pool-level, the modeling of the underlying loans is dependent on the distinct characteristics of the loans within a pool and will be more accurate if the models are run at the loan-level (or at granular rep lines determined by smart rep line logic). The ability to capture and analyze these pool-specific cash flows based on granular loan-level modeling is crucial for several reasons:
- Valuation Accuracy: Each loan can be valued more accurately by considering its unique attributes, such as the original loan terms, interest rates, and borrower profiles (e.g., FICO, LTV); at the same time, pools can be valued based on pool-specific assumptions such as recapture rates and prepayment penalties.
- Risk Management: Understanding the performance of individual pools helps in identifying which pools are more prone to prepayments or defaults, enabling more focused efforts on recapture and other risk management activities.
- Performance Tracking: Investors can track historical returns, CPRs, CDRs, Recapture and other historical performance metrics for each pool, facilitating more informed decision-making.
Supporting this functionality is RiskSpan’s ability to share and integrate data on Snowflake’s data cloud. RiskSpan’s Snowflake integration enhances the data management and analytics capabilities available to clients. Investors can easily share transaction-specific data through Snowflake, which is then seamlessly integrated into the Edge platform. The platform can then handle the large datasets (tens of millions of loans in some instances), providing real-time analytics and insights.
Recapture Analysis: Enhancing Portfolio Performance
Recapture analysis is a critical component for MSR portfolio risk management. When borrowers refinance or otherwise pay off their loans, the servicer’s cash flows usually vanish entirely. However, if, in the case of refinance, the investor retains the rights to service the loan replacing the refinanced loan, then the new loan can be considered as a recapture. RiskSpan’s Edge platform excels in tracking these recaptures, offering several advantages:
- Detailed Tracking: The platform allows for the separation and detailed tracking of original loans and their recaptures, maintaining the distinction between the two. Recaptures should have better performance (i.e., lower CPRs) than original loans.
- Performance Comparison: By comparing the performance of original loans and recaptures, investors can gauge the effectiveness of their recapture strategies.
- Granular Assumptions: Edge supports highly granular recapture rate assumptions used for projecting cash flows, which can be tailored to specific pools or deals, enhancing the precision of valuation.
A Case Study: Supporting a Large Mortage REIT’s MSR Portfolio Management Regime
A practical example of these capabilities involves a mortgage REIT, which relies on RiskSpan’s platform to manage a large MSR portfolio. Specifically, the Edge platform has enabled the REIT investor to accomplish the following:
- Capture Transaction-Specific Data: the investor can track and analyze data at the transaction level, maintaining detailed records of each pool’s performance and its recaptures. This allows, for example, investors to review performance with sub-servicers and evaluate whether certain changes can be made to enhance performance either on the existing pool or on future pools.
- Custom Assumption Setting: The platform allows for custom segmentation and assumption setting for valuation purposes, such as different recapture rates based on prepayment projections or loan age. This provides an ability to more accurately measure future projected cash flows and factor that into valuation of owned MSRs as well as potential purchases.
RiskSpan’s Edge platform offers MSR investors a robust toolset for managing their portfolios with precision not available anywhere else. By enabling pool-specific performance and detailed recapture analysis, Edge helps investors optimize their strategies and enhance portfolio performance. The ability to capture and analyze nuanced data points sets RiskSpan apart, making it a valuable ally in the complex landscape of MSR investments.
MSR investors, contact us to discover how tailored analytics and granular data management can transform your investment strategy and give you a competitive edge.
