Supervisors Symposium

MSR VALUES DROP WHEN DEFAULTS RISE

• From 2020 10-K of Mr. Cooper: • “If delinquencies were significantly greater than expected, the estimated fair value of our MSRs could be diminished” • But Mr. Cooper (and other nonbanks) do not disclose by how much • This risk (unlike interest rates, which also affect MSR values) cannot be hedged • MCR data does not have any information on sensitivity of MSR valuations to changes in defaults or interest rates

MSR ARE OFTEN USED AS COLLATERAL IN COMPLEX FINANCING FACILITIES

• Nonbanks increasingly use sophisticated financial engineering to borrow against MSRs • Financing facilities have covenants and cross-collateralization provisions that make it difficult to see: • How much of the MSRs are truly unencumbered • How vulnerable the nonbanks are to margin calls if MSR valuations drop • MCR data does not specify whether MSRs are encumbered • Or provide information on terms and covenants of borrowing facilities