VA Mortgage Servicing is Risky

To say that VA servicing is risky is an understatement. Take a look at the chart above: VA mortgagors are incredibly sensitive to changes in market interest rates. This analysis encompasses approximately $5T of nationwide conventional and government loans and reflects actual annualized October 2024 prepays (CPR%).

In today’s 6.7% +/- market, mortgages with coupons under 6.0% are pretty safe. However, once rates exceed that, refis increase rapidly. And this increase is most extreme for the VA loans.

Prepay speeds have historically been the highest on VAs. VA cash-out refis allow borrowers to access up to 100% of the equity in their homes (only 80% for FHA).  Additionally, according to the Urban Institute, "the cost of refinancing a VA mortgage is lower than for an FHA mortgage, and VA borrowers tend to have better credit scores, making refinancing easier."

Mortgage servicing rights are similar to IO Strips in that upon prepays, the servicer's cash flows just stop - permanently. There is no recovery of the actual investment in the servicing asset. And, put simply, this risk must be factored into current MSR value.

Stop relying on a guess; why guess when you could be right? Let us put this data to use for you.