Servicing rights are an important component of mortgage lending. Not only can servicing produce significant revenue for your firm, but in times of competitive interest rates (when customers can be more finicky than loyal) servicing enables you to maintain an ongoing relationship—and consistent touchpoints—with existing customers.
If you’re like most of our mortgage servicing customers, compliance and cash flow issues likely mean you need to have your arms around the value of your firm’s servicing portfolio 24/7. And to understand the potential financial risks (and rewards) of servicing retention, you must be able to run scenarios on mortgage servicing rights (MSR) values under various marketplace assumptions to estimate cash flows based on both operating and market-based assumptions for interest rates, loan prepayment rates and discount rates, among other factors.
MSR forecasting made easy
But MSR forecasting and valuation can be difficult—at best—without the proper methodology (and software) in place. Manipulating data and running scenarios in spreadsheets can be time consuming. And, typically, with spreadsheets there’s no ability to easily run multiple scenarios and compare them side by side. Alight Mortgage Lending™, our application specifically designed for mortgage banking firms, provides a solution to the MSR forecasting and valuation challenge.
Case in point
A mortgage banking customer of ours found themselves needing to generate cash to meet a commitment to pay investors an annual dividend, but management was concerned—cash flow was tight and the dividend payout could endanger the firm’s cash position.
Alight’s enterprise-class, cloud-based mortgage lending SaaS-based software streamlined MSR forecasting and MSR valuation. With Alight, executives were able to:
- Create dashboards to quickly see how their firm would perform against each of the ratios that warehouse lenders evaluate.
- Quickly and easily make changes to key assumptions and run scenarios to see the potential downstream impact on those ratios against thresholds.
- Run scenarios for the dividend payout to see that a cash outlay for the dividend would cause the firm to breach the liquidity threshold mandated by one of its warehouse lenders.
- Collaborate with others—in real time—on how to improve the cash position to properly brace the company for liquidity standards.
- And, when the time came to generate cash, they easily created scenarios to evaluate the financial impacts of servicing options—whether to retain servicing and borrow, or institute a bulk sale.
Taking the right path
By running various assumptions through Alight Mortgage Lending’s scenario analysis engine—and examining the financial implications of all options—they found that borrowing against their MSR line of credit to pay the dividend was their best option. It preserved cash while allowing them to maintain servicing levels. Cash flow improved and within two months they repaid MSR borrowings.