Servicing valuations and risks

For the last several years, prepay speed projections have been the overwhelmingly predominant variable in trying to assess the fair value of mortgage servicing assets (MSAs). Several new risks can be created that may become material in projecting MSA cash flows. Most new products are driven by the appeal of lower payments. Getting away from the overvaluation of service-release premiums and MSAs that result in massive impairments during the downward side of the interest-rate cycle is a must. There is a need to build databases of the financial and behavioral dynamics of these new products, further explore the risks inherent in them, and examine the valuation models to ensure that they are sufficiently robust to apply unique valuation assumptions to each and every combination of mortgage attribute.