Interest rate risk of mortgage servicing rights

Dick Boswinkel and Kent Westerbeck examine the behaviour of mortgage servicing rights' duration and convexity and explain how they relate to the prepayment assumptions used in valuing MSRs

Mortgage servicing rights (MSRs) are created when a mortgage loan is pooled with similar mortgage loans to form a security and that security is sold. The entity that communicates with the mortgage borrower, and collects and distributes principal and interest payments is referred to as the mortgage servicer. The servicer is responsible for collecting funds from the borrower and dispersing them to the security holder and the entity that guarantees the creditworthiness of the pool of mortgages. The servicer is also responsible for working out any credit issues that the mortgage has and may hold funds in escrow for the borrower to pay real estate taxes and homeowners insurance premiums when they are due. In return for performing these functions, the servicer:

- retains a portion of the interest payment (usually between 0.25% and 0.50%);

- gets to hold the escrowed funds (which pay little or no interest to the borrower);

- can sell additional services to the borrowers;

- benefits from float during the period between when they receive funds and must disperse them to others;

- incurs a cost to administer the servicing; and so on.

CALL FOR PAPERS

The Technical section of Mortgage Risk welcomes the submission of technical articles on topics relevant to our readership such as those reported in this not-exhaustive list:

- Risk management and asset/liability management for mortgage portfolios;

- Structuring, pricing and hedging of mortgage-backed securities and covered bonds;

- Default and recovery risk analysis for mortgage portfolios/MBS;

- Interest-rate risk for MBS;

- Prepayment modelling;

- Real estate market analysis and empirical research;

- Funding and liquidity risk for mortgage banks and mortgage investment vehicles.

The most important publication criteria are originality, exclusivity and relevance - we attempt to strike a balance between these. Given that Mortgage Risk technical articles are shorter than those in dedicated academic journals, clarity of exposition is another yardstick for publication. Once received by the technical editor and his team, submissions are logged and checked against the criteria above. Articles that fail to meet the criteria are rejected at this stage.

Articles are then sent to one or more anonymous referees for peer review. Our referees are drawn from the research groups, risk management departments and trading desks of major financial institutions, in addition to academia. Depending on the feedback from referees, the technical editor makes a decision to reject or accept the submitted article. His decision is final.

Submissions should be sent, preferably by email, to the technical team ([e-mail]). The preferred format is MS Word, although Adobe PDFs are acceptable.

The maximum recommended length for articles is 3,500 words, with some allowance for charts and/or formulas.

We expect all articles to contain references to previous literature. We reserve the right to cut accepted articles to satisfy production considerations.

Authors should allow four to eight weeks for the refereeing process.