Mortgage servicing rights (MSR) values fell sharply during the third quarter, decreasing between 4-10 basis points depending on the portfolio, according to the latest Market Monthly Update report from Mortgage Capital Trading (MCT).

The drop was precipitated by the declines in both mortgage rates (which plunged from 6.95% in the week ending July 3 to 6.08% in the week ending Sept. 26, according to Freddie Mac) and float income rates (which fell roughly 120 basis points in the quarter). The third quarter’s mortgage rate drop spurred an uptick in prepayments, mostly concentrated within 2022-2023 vintages.

MCT noted that the striking decrease in MSR values led to mortgage servicing losses industrywide in Q3. The number of bulk MSR trades in the third quarter also fell compared to the first two quarters of the year, although MCT projects demand for bulk MSRs (and MSRs as a whole) to remain robust through the close of 2024.

The currently low supply of MSRs, coupled with the ongoing weakness in loan production volume, has kept MSR values at what MCT described as “very competitive levels.” Additionally, both mortgage rates and float income rates have recovered approximately 85% of their rate drops since the third quarter ended, leading MCT to estimate that MSR values should regain at least 50% of the value they lost by the end of Q3. Even with the Federal Reserve expected to trim its anchor interest rate by 25 bps at this week’s meeting, MCT anticipates mortgage rates to remain elevated at least until the end of the year, which should buoy MSR values and MSR demand.

With the rebound of rates, service release premium (SRP) pricing has also recovered. The short-lived refinance “boomlet” in September led to a transitory decrease in SRP pricing during the month, but per MCT’s data, aggregators have now upwardly readjusted their pricing for new originations. Current SRP pricing is running about 12-17 bps higher than fair values.