In this week’s episode of Optimal Insights, Jim Glennon, Alex Hebner, and James Cahill discuss mortgage rate context, the latest labor market data, and what to watch in upcoming CPI and PPI inflation reports.

Then Vimi Vasudeva joins James to deliver an MSR 101 breakdown, explaining what mortgage servicing rights are, what drives MSR value, how multiples work, and key considerations in retain-versus-release decisions. They share expert insights into how these factors are shaping the industry and the broader economic landscape.

Next week, Vimi and James continue the MSR conversation with a Day in the Life discussion. Stay tuned.

Key Points

• A market update on rates and spread context, including the OBMMI conventional 30-year (6.3%) and the 10-year (4.4%).
• A macro recap and look-ahead: jobs and unemployment (4.3%) plus CPI and PPI expectations for the week.
• MSR 101: what MSRs are, what drives MSR value (especially prepayments), how MSR multiples work, and retain-versus-release tradeoffs.

Chapters

• 00:00 – Opening, rate snapshot, and week-ahead setup
• 02:06 – Market update: jobs, inflation week, and macro drivers
• 10:01 – MSR 101: definition, value drivers, multiples, retain vs release

Optimal Insights Team

• Jim Glennon, SVP, Hedging & Trading Operations
• James Cahill, MSF/MSR Account Manager
• Alex Hebner, Hedge Account Manager
• Vimi Vasudeva, Managing Director, Hedging & Trading Client Services

Production Team

• Executive Producer: Sara Holtz
• Producer: Matt Gilhooly

Commentary included in the podcast shall not be construed as, nor is Optimal Blue providing, any legal, trading, hedging, or financial advice.

Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode.

Welcome everybody. Welcome. It is a new week. We've got a great show for you today. And as always, in the interest of making sure you know what to watch, whether you're an originator or a capital markets person.

or just someone interested in mortgage industry some great market commentary. Keep listening in.

Today, we're gonna do market update as always. We had some unemployment data last week. We've got some inflation data coming up this week. We'll also talk a little bit about what's going on or not going on with the war in Iran. After that, we will bring back an oldie, but a great one. We'll have James and Vimi on to talk MSR, so mortgage servicing rights. So we'll talk a little bit of MSR 101 and how that feeds into things like loan pricing and

refinance, recapture, all kind of simplify the area around the MSR market. Before we get to that, just in the way of data, the OB-MMI, the conventional 30 year, that sits currently at 6.3%. So still pretty elevated, higher than we'd like to see it, but as long as we've got this war happening and we know real path or off ramp to resolution, I think we're going to continue to see rates above that 6%.

And then the 10 years at 4.4, so still relatively thin on the spread between those two, less than 2 % is what we like to see, we're about 1.9. So we'll keep an eye on that. All right, let's check in with James and Alex and get our market update.

Okay, welcome gentlemen. James, Alex, how's it going?

Morning Jim, doing well, how are you?

We have a new week. But first, before we get into this week, what happened last week? We had the big numbers. We had unemployment and a little bit, maybe a little bit of activity in the war in Iran, although it's starting to feel like Groundhog Day. Let's start with numbers. What did we see for non-farm? What's the unemployment picture look like?

Definitely, non-farmers definitely the biggest number of last week. was strongly to the upside. was plus versus an estimate of about 55,000. So kind of blew the number out of the water. Don't like to get too over our skis on these numbers just because it is the end of the day just to drop in the bucket. But looking through it, the unemployment rate didn't change at all. It's still sitting at 4.3%.

I like to see that it wasn't just all healthcare jobs this time around. It was only a third or so healthcare jobs that came in about 37,000 and then transporting and warehousing, which is usually the second runner up that are construction jobs. They kind of trade places for second place. one came in second place. So it was a little bit more of a balanced jobs report. But aside from that, think the most outstanding part about it was that it did...

Right.

was far better than the estimates we're expecting.

Right. Yeah. We keep plugging along low unemployment rate, making a decent amount of jobs every month, other than a, you know, a small negative number a few months back, we're still kicking. it's, you know, it puts the fed in kind of an interesting or kind of a boring spot where they, you know, unlikely to cut rates because of what's going on with unemployment and inflation.

But unlikely to hike rates either, because things are kind of, I don't know, still feel a little bit fragile on the surface, under the surface. What did we get in terms of Iran? we any notable changes there? I feel like every week it's just another negotiation or another negotiation that's terminated or thrown out the window.

Absolutely.

Yep. Yeah. Very much so the same this I think all of last week was kind of hyping up the expectation that Iran was going to respond to the U.S.'s initial plan. Their response was clearly not enough. Trump shot it down on true social pretty quickly, saying it was unacceptable what they were asking for. So we're kind of back to square one. There's no active at least between the U.S. and Iran. There's still proxy conflicts going on.

Mm-hmm.

the odd drone goes up every now and then, but that doesn't seem to shake the foundation of the ceasefire itself until like an all out shooting war like we saw back in March. But it does feel like on the diplomacy front, we're back to square one at the moment. I do wanna note, Trump is traveling to China. He's having a meeting with Xi Jinping. Iran is typically, they're not a communist country by any stretch of the imagination, but they are Chinese aligned. So maybe they can hammer something out.

between Trump and Xi in Beijing. I think that's kind of what people are waiting for at this point. again, we're back to square one in regards to the Pakistani intermediate talks between Iran and the US.

Yeah, nothing, no big changes there. still have expensive oil, expensive gas. think, yeah, the average 450, that's about what we're paying here in Colorado. I was just in California. They're going to have to add an extra digit to some of those boards out in front of the gas stations. They're getting upwards of, you know, close to $7 a gallon in Southern California.

Ha ha.

Yeah, no, it definitely feels like a who blinks first kind of scenario. Both sides seem to think that they have, they have the cards, you know, the, U S is kind of banking on, I still think they're kind of banking on maybe some sort of regime change or a softening in the IRGC's positioning while at the same time, Iran's kind of banking on it's an election year. ⁓ you know, Trump doesn't, he's being blamed for higher gas prices and, and, ⁓ polls are showing that this conflict itself is relatively unpopular. So,

Mm-hmm.

Yeah, it will have to see, only time will tell.

Right. And meanwhile, there's a couple other wars going on. keep having to remind myself of that. was reading again about the Ukraine, Russia war and the amount of people that have been killed in that conflict and just the undertone or the thought there ⁓ might be regime change in Russia here in the not too distant future. think the people of that country are feeling like Putin maybe has overstayed his welcome in power.

And I think a millionish soldiers have died in that war, which is just kind of bananas considering they were the invading party in that scuffle. anyway, still a lot going on in the world. like you said, only time will tell.

Absolutely, absolutely. If it's anything like ⁓ the closure of the Syrian civil war, it could be really fast after quite a long period of stagnation. So we'll have to see.

Right. All right. What's going on this week? We get some numbers. We get to see the rest of the picture, which would be inflation, the second half of the coin for the Fed kind of expecting higher numbers because we're getting probably now the full impact of the war in Iran and fuel prices, which, you know, raising all prices across the board.

We are coming back to inflation this week after jobs at the end of last week. We'll see on Tuesday, we'll see CPI. The expected value right now is going to be up 0.6%, which puts us at a total year of a year of just the generalized number. It's 2.7 % core, which strips out the most volatile piece right now being food and of course, energy in the form of gasoline. As you said, California is looking at some pretty high gas

prices. As this war continues, may see this continue to see that spread between core and the actual number kind of continue to widen. expect all goods, all services to slowly be pushed up over time. But if gasoline keeps on its kind of precipitous rise, that spread will continue. Wednesday.

we'll come around to PPI. So we'll get to see where the inflation is hitting producers. The increase of 0.6 % is the same, overall PPI sits around 4 % and it's 3.6 % core. So it's much higher on the producer side, which makes sense. You know, over the past two years now, or a year and half, we've been talking about.

the tariffs and who's been eating them. If the producer side of this has been taking a lot of the blow, inflation has been creeping up more than it on the consumers. And now this is continuing to push them further up.

Right. So we'll continue to see, I guess with fuel as well, if producers are eating some of that cost or if they're just adding it onto what they're charging the consumer.

All right. What else are we seeing here? So we've got, we covered the meeting between Trump and China. Covered everything on inflation. Yeah. We're not, not seeing a ton right now, but I guess next week we will all be in New York city. So hopefully we'll see some of y'all there. We'll have some other discussion. We'll, we'll record another podcast leading up to that. And we'll have some next week's numbers for you as well.

All right, what else, gentlemen?

think that just about covers it. I'm looking forward to ⁓ seeing some folks' faces in New York.

Yeah, same. All right. Quick and easy this week. Thanks a lot for the info. Alex, James, appreciate you.

And that's.

Hey, good afternoon, everyone. My name is James Cahill. I'm joined by Vimi Vasudeva of the MSR team. She's actually my boss. going to be talking MSR 101. We're going to be doing a two-parter here. First part is just an introduction to MSR. What are these assets? How should we think about them? The second part will be does the MSR team do day to day, as well as how should we think about

hedging these types of assets.

start, if you price out loans or you're hedging or you think about profitability, you're actually probably dealing with MSRs, whether or not you really realize it.

Yeah, and James, that is my favorite part because people will often say, I don't really use it with MSR. I don't really need to understand this asset very well. And that's when I say, definitely do. You just don't call it that.

Yeah, I've heard it said it's like taxes, right? ⁓ You might not like them, but they're definitely there and you should know about it.

Yeah, that's a great analogy. But MSRs, they do show up in an originator's rate sheet. They show up in pipeline marks, which is best execution. They show up in retain versus release decisions. So even if you're not on the servicing side, the MSR is actually quietly influencing a lot of your decisions.

into our first question here, I've been laughing at this all morning because of course am on the MSR team underneath Vimi. So hopefully I could have been able to answer these, but Vimi, what is an MSR?

James, that's so funny because I was thinking about that. was like, hmm, should we have reversed roles here so I can test James's knowledge? But I certainly don't need to. I know that you know all the yes, let me explain what an MSR is. And I should probably start by actually defining the acronym. I think everyone knows the mortgage industry loves a good acronym, but the MSR stands for the mortgage servicing right. What this really is, it's a right to collect.

cash flows over time from servicing a mortgage. So this might be servicing a mortgage that an originator has originated or that an investor has bought. Either way, the owner of the MSR collects a servicing fee, a base fee that they're compensated for for servicing the loan.

And since the servicer has to collect monthly payments, and as part of this duty is to remit the principal and interest part of the payment to the ultimate investor, ⁓ also having to manage the taxes and insurance part of the payment, the servicer will deduct a fee from the borrower payment before remitting the payment to the investor.

So what is the typical servicing fee and how does that translate into dollars?

Yeah, so I would say the typical servicing fee is going to be anywhere between 25 and 50 basis points for a fixed rate conventional loan. That's generally going to be 25 basis points. And what this means is you can think of it as a percentage, right? 25 basis points means a quarter percent of the remaining mortgage balance, also known as the unpaid principal balance, UPB, another one 12th of which is paid per month. So

To put this into a numeric example, let's think about a mortgage with a UPB of 100,000. The servicing fee is 25 basis points. And so this means that the servicer is entitled to retain the quarter percent, the 25 basis points divided by 12, times 100,000 UPB, which translates into roughly $21. And so what this means is that before passing on a borrower's payment to the final note holder,

servicer gets to keep that 21 ish dollars, then that's what they're compensated for. So that's the base income, right? But then of course we want to consider that there are other income opportunities with servicing that includes the escrow income. So we talked about how borrowers have to remit part of the payment to, taxes and insurance, but they have an opportunity to earn income on that part of the payment.

And this has, of course, become a much larger part of the value in recent years given the higher rate environment. could be ancillary income. Let's suppose you're a bank with cross-sell opportunities. There is definitely opportunity to earn income by selling other services to the borrower a couple of other opportunities as well. But as mentioned before, the servicer is actually having to service alone. So of course, there are going to be some costs that come into play.

Yeah, so it's two halves. have income and a responsibility.

Yeah, yeah, exactly. sounds great, right? Until you remember that you actually have to do some work.

Yeah, it's not quite a passive income stream.

not quite. the balance between those cash flows and the cost is really what's driving the value, which is why it's such an important part of pricing and profitability and so important for originators to really understand the value of the MSR.

So once you, now that you understand what the MSR is and the importance of pricing, what is it that actually moves an MSR value?

That's a really good question, James, because, we can figure out what the value is now, but then how do you figure out how that value is changing over time? And I would say that the single biggest driver is going to be prepayment behavior.

So when rates fall, borrowers are very likely to refinance faster, which means that the MSR owner's cash flows are going to end sooner, which then translates into MSR values going down. And then on the other hand, when rates rise, borrowers are likely to stick around longer. And so the MSR value is going to go

So in a weird way MSR kind of likes it when rates are higher.

Yes, it's actually one of the few places in mortgage where people are quietly rooting for rates to go the other way.

Careful which audience you say that to. That's a heated item.

Yeah, right? Know your crowd. OK, so beyond rates, we've got real world factors to consider, right? So things like delinquency, cost to service, escrow balances, remittance timing. And just to break some of those down, if delinquencies rise, servicer's cost to service those delinquent loans is going to increase, which, of course, would pull down the value.

We talked about the opportunity to earn income on an escrow balance when we were looking at the positive cash flows. But then again, in a delinquency situation, the servicers on the hook to still remit that part of the payment to the tax and insurance agencies, but they're not receiving the payment from the borrower. So they're on the hook. That's a cost to them.

generally speaking, delinquencies are going to make servicing more expensive operationally. And of course, that's going the value as well. So I would say in general, is absolutely the steering wheel and everything else is just kind of road conditions.

Ooh, I think that's a good little line. I'm definitely gonna steal that one for pricing, you talk to MSR, everyone is always speaking about multiples. Can you define what multiples are and how we use them?

Feel free to.

Yeah, sure. That's another important distinction for our audience. So an MSR multiple, you can really think about it as a standard valuation metric that's used in the secondary mortgage market. And it's expressing the price of an MSR asset as a multiple of its servicing fee.

So technically it's calculated by dividing the market value of the MSR, which is stated as a percentage of the UPB, the unpaid principal balance, by the weighted average servicing fee. And this is important, right? Like someone might be asking, well, why would you do this? Why don't you just quote this in terms of price? But because there are varying degrees of varying structures in what the sort of, to what the servicing fee could be using a multiple provides a consistent normalized way

to

compare MSR values or MSR portfolios across these varying structures. And so to get into another numeric example, consider that we have a portfolio valued at 100 basis points. And so it's 1 % of the UPB. If in this scenario, the rated average servicing fee is 25 basis points, well, that's going to result in a multiple of four, because we're taking 100 divided by 25.

and the multiples for. So it just provides an easier method for

Okay, yeah, so it's just a way to boil all the different loans down to a single number so that you could compare the valuations. So with that, now that we know what an MSR is, what's kind of moving it around and how we should be talking shop on it with mults, could you speak a little bit to retained and released, this concept that you hear a ton about over an MSR?

Yeah, for sure. that's good transition, James, because when someone is considering whether they're going to retain or release, it is really important to look at all aspects of the cash flows does this mean in terms of what would my MSR multiple be if I were to retain versus release? So to answer your direct question, would really say at a high level, you're looking at the value of income today versus the value of potential income

in the future.

And so if you release, you're getting paid upfront, right? You're getting that cash immediately. There's no guessing about what's going to happen in the future. The servicing assets not your problem anymore. It's someone else's. Or it's not your opportunity, I should say. But if you retain, you hold on to a stream of these future cash flows. And you've got to kind of figure out what do these future cash flows mean for me today? How much can I depend on them? I.E.

Would the cash flow still be around if rates decrease because the borrower is more likely to prepay, et cetera. So lots of things to consider there.

Yeah, so really on the base, we're talking about is instant gratification in the form of getting the cash right now or delayed gratification in holding the asset and being able to service it over the longer period and getting cash throughout.

Yeah, exactly. guess one could say that MSR was the mortgage version of do I eat the cookie now or do I eat the cookie later?

I know in my household ⁓ it goes quick.

Yeah,

same. But right. So especially in the, you know, a tight margin environment, such as the environment that we've been in for quite a while now, cash can be really compelling, right? Like you want to sell the servicing to get the cash, but then you also have to think about if you sell that servicing, you're essentially selling the borrower relationship.

you are giving up the opportunity to more easily get a chance to refinance that borrower when the borrower decides to refinance because you no longer have that relationship. And this has been a really hot topic in the industry over the last couple of years and we have talked about it on the podcast countless times so we won't spend too much time today on that. But it's of course an important thing to talk about when you ask how should one consider the retain release decision.

And then finally, of course, you do want to think about operational capacity, right? Do you have the capacity or do you have the infrastructure to support servicing? if you don't, well, then of course, the answer there is that you should sell the servicing to someone else who can do that. It's really not as simple as it sounds.

Yeah, so at the most basic it is that, hey, do I need the cash now or can I have it later? But there's more to consider. If you're having the cash now, you're giving away the relationship, which that makes cash flows later of a refinance or a second mortgage. You're kind of selling that away as well. But if you retain, you need to have a team that's able to process that. So it sounds like there's just a lot more than.

just the easiest way of looking at it.

Yep, you got it.

I, whatever I think, cause I came from the pipeline side. So whenever I think about MSRs, I'm always looking at like LLPAs and I'm going, okay, this borrower has a high or a low FICO score. So we are going to dink the price or the UPB is extra high. So, maybe Fannie wants it, but Penny doesn't. What are there any adjustments on the MSR side that would matter in the sort of way that an LLPA would on pipeline?

Yeah, that's a great question. So certainly there's going to be some overlap into what data plays a role in driving the value or assessing the risks of the MSR. I would say that one of the biggest ones is obviously going to be interest rate, right? Because that's going to determine the likelihood to prepay. We talked about that being the biggest driver of MSR value. So what is my current note rate? What is the rate that is being offered out there today? Do I have a chance to refinance and save on my monthly payment?

But of course, there are many other borrower specific data points to look at to assess the propensity to repay, to prepay, sorry. one of those would be state. There are certain states in which it's very high likely, very unlikely for a borrower to turn over and get a new house or to refinance the loan. Another one is going to be UPB. And this one, you know, as you mentioned, the pipeline side, James, this is a pretty big one on the UPB side.

especially as of late with the introduction of new spec pay ups, the investors and agencies are paying up for low loan balance pools, loan balance loans, because those loans are very they're not as likely to prepay even if rates drop because you only have a certain amount of money left only certain amount of obligation left on your mortgage. Are you really going to go through the effort?

of refinancing your loan. would be another big one in terms of assessing voluntary prepays. Of course, you'd want to look at things like the borrower FICO and LTV to assess ⁓ involuntary prepay. So that means to assess the likelihood of a borrower potentially going delinquent. So I would say those are some of the heavy hitters.

So it is kind of similar, right? Frontend, backend, pipeline, MSR, a lot of the same fields thinking about the same way. What's really going on is these guys have thought about, how likely is this to prepay? And that's kind of part of why they're valuing it spec wise.

Absolutely. Yep.

Perfect. Well, Vimi, I appreciate the time. We'll be back for part two to talk a little bit more about what the MSR team does day to day, as well as how you might think about hedging an MSR. Thank you.

Yeah, it'll be my turn to ask you the questions, James. I'm looking forward to it.

I'll be reviewing my notes.

All right, let's close this thing out. Thank you, Alex, James, and Vimi. Great show. Appreciate the time, appreciate the knowledge. That's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.