What’s the Impact on Subprime MSR Values?
To demonstrate the impact on MSR pricing of the migration from voluntary prepayments to involuntary prepayments, we used a benchmark subprime MSR portfolio in which we modified the previous market consensus foreclosure curves to project higher foreclosure probabilities over the lifetime of the MSR portfolio asset. In our sensitivity analysis, we observed changes in the values at different levels of foreclosures. We adjusted our base foreclosure rate in increments of 120%, 150% and 200% to see the impact on the MSR asset. We isolated the major cash flow components and their respective impact on servicing values. Additionally, we held the total prepayment projection constant with a re-allocation of the voluntary and involuntary prepayments. In the increased foreclosure scenarios, involuntary prepayments went up at the expense of voluntary prepayments. From the revenue side, increases in the foreclosure probability resulted in lower servicing income streams and lower prepayment float inco
