Hedging: BMA Prepayment Tool Grows Popular in MSR Valuations.(Bond Market Association)(Brief Article)

While Bloomberg Medians have long been a widely used measure of mortgage prepayment activity, the Bond Market Association's new version of its projected prepayment models may be a better tool in valuing and hedging mortgage servicing rights, industry sources say.

The problem, according to Paul Van Valkenburg of Mortgage Industry Advisory Corp., is that the Bloomberg data is affected by "too much noise" that can affect the value of servicing rights if Bloomberg Medians are used as consensus prepayment estimates.

In addition, the Bond Market Association made changes to its projected prepayment model in April, making its survey of dealer prepayment projections more useful to many market participants.

Mr. Van Valkenburg says that new MSR pricing tools, such as his firm's Mortgage Industry Medians, can help take the noise out of both Bloomberg Medians and the BMA prepayment data.

Mr. Van Valkenburg, a principal at MIAC, New York, said the issue lenders must grapple with is the consistency and predictability of using a consensus prepayment model in pricing MSRs.

With accounting changes such as Financial Accounting Standard 133 bringing more attention to hedging practices and servicing values, the reliability of prepayment assumptions is under a microscope for big lenders, he said. Lenders must show that changes in the market value of their MSRs is offset by changes in the market value of their hedges.

Because of the wide market acceptance of Bloomberg Medians, they have been widely accepted in the mortgage industry for pricing mortgage-servicing rights, he said.