MSR Hedging Considerations for Today’s Environment

In the past year, many institutions have experienced significant increases in the value of their mortgage servicing rights (MSR) assets, making MSR hedging a timely topic. MSR assets generally increase in value when rates increase due to slower prepayment speeds leading to higher projected servicing income. In fact, the coupon rates for many servicing books are so low that models don’t project any further decreases in prepayment speeds given a rise in rates! It seems likely that many MSR assets may have reached their terminal values with refinance activity grinding to a halt. Simply put, there seems nowhere to go but down from here for MSR asset values. The good news is that depositories can lock in some of that value and protect themselves against a future falling rate environment throug...

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