MSR Economic Valuation

The value of a Mortgage Servicing Right is based on the present value of expected cash flows

Value of MSR

Cashflow Assumptions

  • Value of each payment - 25 to 50 basis point strip
  • Expected average life of the loan - this expectation is based on anticipated prepayment speeds
  • Add benefit of float, escrow and ancillary income
  • Less: costs to service

Discount Rate

  • The discount rate implies a certain level of profitability/return
  • Expectations of return are based on compensation for the riskiness of the asset and the cost of servicing

The value of this asset can change significantly (both positively and negatively) because of both interest rate and prepayment risk

Was this article helpful?

0 -1

Post a comment