Module 8

MSR Cashflow Engine

RiskSpan Edge Training Program

Learning Objectives

By the end of this module, you will be able to:

  • Explain what MSR (Mortgage Servicing Rights) are
  • Understand the MSR Cashflow Engine purpose
  • Identify MSR income and expense components
  • Configure MSR assumptions
  • Run MSR analysis in Edge
  • Interpret MSR cash flow reports

What are Mortgage Servicing Rights?

Definition

MSR (Mortgage Servicing Rights) is the contractual right to service a mortgage loan.

How MSR is Created

When a loan originator sells a loan but retains the servicing, an MSR asset is created on their balance sheet.

What Servicers Do

  • Collect payments from borrowers
  • Remit principal and interest to investors
  • Manage escrow accounts
  • Handle delinquencies and defaults
  • Process loan modifications

MSR Valuation Basics

Value Drivers

MSR Value = Present Value of:

Expected Revenue - Expected Expenses

Revenue Sources

  • Servicing fees (basis points on balance)
  • Late fees
  • Ancillary income
  • Float income

Expense Sources

  • Servicing costs
  • Advance funding costs
  • Foreclosure costs
  • Recapture costs

MSR Engine Overview

What It Does

The RiskSpan MSR Engine provides:

  • Detailed cash flow forecasts
  • Based on projected servicing activities
  • Considers loan performance status

Key Reports

Report Content
Income Projections Servicing fees, float, ancillary
Escrow Balances Tax and insurance reserves
Servicer Advances P&I, T&I advances
Expense Projections Servicing costs, foreclosure

MSR Assumptions

Where to Configure

Location: Scenario Library -> MSR Assumptions tab

Category Examples
Costs Current cost, delinquent cost by state
Income Ancillary income, late fees
Float P&I float days, escrow float rate
Advances Advance funding rate, recovery timing
Recapture Recapture percent, servicing multiple

Cash Flow Engine Variables

Inputs to Calculations

Variable Definition Source
CPR Prepayment rate User or Model
CDR Default rate User or Model
Delinquency State 30/60/90+ days Credit Model
Loss Severity % not recovered User or Model
Loan Features Balance, rate, term Loan Tape
Yield Discount rate User Input

Delinquency States

RS Credit Model v6.0 States

The MSR Engine tracks these states:

State Description
Current Paying on time
30 DPD 30 days past due
60 DPD 60 days past due
90 DPD 90 days past due
State Description
120 DPD 120 days past due
150 DPD 150 days past due
180 DPD 180 days past due
Foreclosure In foreclosure process
REO Real Estate Owned

Note: Different servicing costs apply to each state.

Income Components

MSR Revenue Sources

Component Formula/Description
Servicing Fee Service Fee Rate x Performing Balance
Delinquent Servicing Fee Fee Rate x Delinquent Balance
Ancillary Income Survival Factor x Ancillary Value
Late Fees % of non-performing x Survival Factor
P&I Float Income (Principal + Interest) x Days/360 x Rate
Escrow Float Income Escrow Balance x Days/360 x Rate
Recapture Income Vol Prepay x Recapture % x Multiple

Expense Components

MSR Costs

Component Formula/Description
Onboarding Fee One-time setup cost
Base Cost to Service Current Cost + Delinquent Cost
Current Cost % of balance x Monthly cost x Growth
Delinquent Cost Sum of (DQ rate x DQ cost) by state
Foreclosure Cost FC % x FC Cost + REO % x REO Cost
Advances Accrued P&I + T&I advances
Advance Funding Cost Outlay x Funding Rate x 30/360

Key Formula - Survival Factor

What It Is

The portion of the original loan still remaining:

Survival Factor = Current Balance / Pristine Amortization Balance

Why It Matters

  • Many assumptions are per-loan dollar amounts
  • Factor scales them to actual remaining balance
  • Ensures accurate partial balance calculations

Float Income Calculations

P&I Float Income

P&I Float = (Sched Principal + Interest) x (Float Days / 360) x (Index + Spread)

Payoff Float Income

Payoff Income = Prepayment x (Payoff Days / 360) x (Index + Spread)

Compensating Interest (Expense)

Comp Interest = Prepayment x (Comp Days / 360) x Note Rate x (-1)

Remittance Income (Net)

Remittance Income = P&I Float + Payoff Income + Comp Interest

Recapture Income

What is Recapture?

When a servicer retains a customer by offering a refinance, creating a new MSR asset.

Calculation

Recapture Amount = Voluntary Prepay x Recapture % x Forecast Multiple
Recapture Income = Recapture Amount x Servicing Fee x Servicing Multiple

Why It Matters

Effective recapture programs can significantly boost MSR value.

Aggregate Cash Flow

Final Calculation

Income

  • Servicing Fees
  • Late Fees
  • Ancillary Income
  • Remittance Float
  • Recapture Income
  • Reimbursed Expenses
  • Escrow Float Income

Expenses

  • Base Cost to Service
  • Onboarding Fee
  • Foreclosure & Liquidation Costs
  • Advances Accrued
  • Advance Funding Costs

MSR Cash Flow

Aggregate = Income - Expenses

Running MSR Analysis

Step-by-Step Process

Steps

  1. Load Loan Tape with MSR data fields
  2. Navigate to Scenario Library
  3. Create/select MSR Assumptions
  4. Go to Portfolio View
  5. Load the loan portfolio
  6. Select MSR Assumptions scenario
  7. Click Run Analytics
  8. Review results or Download Cash Flows
MSR Analysis Workflow
Video: 60:00-80:00

Interpreting MSR Results

Key Output Metrics

Metric Meaning
MSR Value Present value of net cash flows
Servicing Multiple Value / Annual Servicing Fee
WAL Weighted average life
Duration Price sensitivity to rates
Total Income Sum of all revenue
Total Expense Sum of all costs

Cash Flow Report

Monthly projections of all income and expense components.

Common MSR Support Questions

FAQs

Q: Where do I set MSR assumptions?

A: Scenario Library -> MSR Assumptions tab

Q: What if my loan tape is missing fields?

A: Use data mapping to set defaults or flag for review

Q: How do delinquency costs apply?

A: Different cost per loan based on DQ state from credit model

Q: Can I compare multiple MSR scenarios?

A: Yes, use Yield Table View or run multiple scenarios

Module 8 Summary

Key Takeaways

  1. MSR = Right to service a mortgage loan
  2. MSR Value = PV of (Revenue - Expenses)
  3. Income: Servicing fees, float, ancillary, late fees, recapture
  4. Expenses: Servicing costs, advances, foreclosure costs
  5. Delinquency states: Current through REO (8 states)
  6. MSR Assumptions configured in Scenario Library
  7. Aggregate Cash Flow = Income - Expenses
  8. Survival Factor scales per-loan assumptions

Congratulations!

You've completed the Edge Platform training modules.

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