1

MORTGAGE SERVICING RIGHTS:

Valuation Primer & Market Update
Jeff Boyd,  Senior Vice President
Erin Gilbride, Senior Vice President

Phoenix Capital, Inc. | 999 Eighteenth St Suite 1400 | Denver, CO 80202 | 303.892.7070
Phoenix Capital, Inc. | 999 Eighteenth St Suite 1400 | Denver, CO 80202 | 303.892.7070
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With over 200 clients throughout the country, the Phoenix Family of Companies…

…continues to be the industry leading MSR advisory firm offering comprehensive solutions for its diverse

client base. Having expertly managed over $700 billion in successful MSR transactions since 2013
alone, Phoenix Capital maintains the deepest knowledge base in the MSR space. This real‐time market

intelligence is seamlessly integrated into Phoenix Analytics’ suite of services, including MSR valuations
for two‐thirds of the top 20 banks and servicers, currently over $30 trillion in annual UPB. Our
expertise extends to servicing audits and surveillance, REO disposition and whole
loan trading solutions.

5.12.16 Private and Confidential

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Executive Summary

As the number of companies investing in the Mortgage Servicing Asset (MSR) continues to grow, the
scrutiny and oversight from the auditors, regulators and guarantors continues to increase. The MSR
asset often quickly becomes the largest asset for most Independent Mortgage Bankers. For banks that
retain MSRs, it is one of the most volatile assets.

This presentation will focus on:
Review of MSR asset
Considerations for Owning the MSR Asset
Valuation Basics
MSR Market Update
Phoenix team and contact

5.12.16 Private and Confidential

MSR Asset Defined
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What is a Mortgage Servicing Right?
Fannie Mae
A mortgage servicing right (MSR) is a strip of interest from the Freddie Mac Held or sold to
Ginnie Mae Mortgage Servicer
loan, and based on the accounting rules becomes an asset Private Investor
when a mortgage loan is sold servicing retained. The strip of Or held for Portfolio
interest is paid to the servicer to perform the servicing duties
based on the investor guidelines. Mortgage servicers are
responsible for the collection of payments on the mortgage
Mortgage
loan and the distribution of these payments to the Loan
appropriate authority (including investors, tax authorities and Mortgage
insurance companies). The value of the MSR asset is driven Servicing Right
primarily by the strip of interest, but the servicer can also
earn income from late fees, ancillary income and float
income. Loan Originator

Borrower

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What is a Mortgage Servicing Right?

A 4.75% GSEs charge a

Gross Servicing Net Service Fee
mortgage is Loan is assigned Guarantee Fee
Fee (GSF) = (NSF) = GSF –
originated. This is to 4.00% to ensure the
Borrower Interest Gfee:
the interest rate coupon. This is the value of the loan
Rate – Coupon: 0.750% -
the borrower interest rate the in case of
0.750%. 0.500% =
pays. investor receives. default. Ex: Gfee
0.250%
= 0.50%

For FNMA or FHLMC servicing: For GNMA servicing

 25bps is the contractual minimum service fee   GNMA Is are at a minimum of 44 bps
 Any amount of service fee above 25 bps is   GNMA IIs are at a minimum of 19 bps
considered excess (for tax purposes)

The value of servicing is the net present value of the servicing revenue components less expenses, adjusted for expected prepayment
speeds. The servicing value is expressed as either a multiple of the service fee or as a percentage of the UPB. For example for a FNMA
loan that has 25 bps of interest, its value can be expressed as a 4 multiple or 100 bps.

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MSR Examples
MSR Example with no excess MSR Example with excess
A 4.75% 30 Conventional fixed rate loan is pooled and  A 4.875% 30 Conventional fixed rate loan is pooled and 
securitized into a 4.00% (in this example the guarantee fee is  securitized into a 4.00% (in this example the guarantee fee is 
50 bps (or .5%) 50 bps (or .5%)

Mortgage Rate             4,75% Mortgage Rate            4.875%
MBS Security Rate      (4.00%) MBS Security Rate      (4.00%)
Guarantee Fee            (0.50%) Guarantee Fee            (0.50%)
Service Fee                  (0.25%) Service Fee                  (0.25%)
Remaining Interest      0  Remaining Interest     .125%*   
If the MSR asset was determined to have a fair value of 100  * During pooling process, the .125% can be sold to the agency, 
bps (or a 4 multiple), it would be capitalized at 1% (100 bps)  or capitalized as servicing making the servicing strip 37.5 bps.
of the unpaid principal balance.

5.12.16 Private and Confidential

Owning the MSR Asset
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Owning the MSR Asset
The MSR asset is volatile and values can change due to a number of factors other than just interest rates; an effective
risk management process is critical to managing and communicating the MSR risks.
• Risks to the MSR asset include not only the risk of mispricing the MSR asset, but also the operational risks associated
with servicing
• The MSR asset is viewed as a Level 3 asset and therefore an assumption based valuation approach is appropriate
• Effective risk management is an on‐going process that requires continual monitoring and improvement
Assumption tracking
Calibration of cash flows
Regular reporting and communication of the values
Identification of current and potential risks to the MSR asset
Knowledge of the current MSR market conditions

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Servicing Retained Decisions
Economic Value vs Market Value Capital Requirements
Minimum Net Worth (all servicers) = $2.5m + 25bps of MSR Portfolio
Investor Type UPB
Ex: Servicing Costs and delinquencies are anticipated to be Minimum Capital Ratio (Non Depositories): tangible net worth/total
higher for Ginnie vs. Fannie/Freddie assets >=6%
Product (Fixed v. ARM) Minimum Liquidity (Non Depositories): 3.5bs; of total Agency
(FN/FH/GN) + incremental non depositories liquidity for higher non
State/Geography (licensing, judicial/non) performing portfolios (incremental 200bps * sum of 90+ dq in excess of
6% of total Agency UPB)
Channel of Origination (retail v third party) Minimum 
UPB of MSR  + 25bps of  Net Worth 
Cash flow considerations (cost of advances/remittance types)
Portfolio Base Capital UPB Required
Key Customers, Friends and Family $              100,000,000 $  2,500,000 $       250,000 $    2,750,000
$              250,000,000 $  2,500,000 $       625,000 $    3,125,000
Amount to hold – liquid market exists, but takes time to monetize $              500,000,000 $  2,500,000 $   1,250,000 $    3,750,000
the asset $              750,000,000 $  2,500,000 $   1,875,000 $    4,375,000
$          1,000,000,000 $  2,500,000 $   2,500,000 $    5,000,000
$          5,000,000,000 $  2,500,000 $ 12,500,000 $ 15,000,000
$        10,000,000,000 $  2,500,000 $ 25,000,000 $ 27,500,000

5.12.16 Private and Confidential

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MSR Advances (Example)
GNMA S/S
4% 30 Year Fixed Mortgage

Time Delq 
(Months) UPB P&I  Payment Avg T&I
Total Cash 
Advanced (2)
Total Cash 
Advanced (3)  The remittance structure of the
3                      175,000                    835 200                3,105                 3,105 servicing has a material impact on
6                      175,000                    835 200                6,210                 3,705
9                      175,000                    835 200                9,315                 4,305
12                      175,000                    835 200             12,420                 4,905 the potential advances that are
15                      175,000                    835 200             15,525                 5,505
18                      175,000                    835 200             18,630                 6,105 made on the behalf of delinquent
24                      175,000                    835 200             24,840                 7,305

(1) Assumes that T&I and P&I payments are made for each month of delinquency borrowers
(2) Assumes that loan is not bought out of the pool at 90 days of delinquency


(3) Assumes that loan is bought out of the pool at  90 days of delinquency
Ginnie Mae servicing is always
FNMA A/A
4% 30 Year Fixed Mortgage schedule/schedule remittance

Time Delq 
(Months) UPB P&I  Payment Avg T&I
Total Cash 
Advanced
 Sample of cash advanced is based

3                      175,000                    835 200                   600

only on P&I and T&I (other cash
6                      175,000                    835 200                1,200
9                      175,000                    835 200                1,800 outlays exist)
12                      175,000                    835 200                2,400
15                      175,000                    835 200                3,000
18                      175,000                    835 200                3,600
24                      175,000                    835 200                4,800

(1) Assumes that T&I  payments are made for each month of delinquency

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Subservicer Model
Subservicing Pros Subservicing Cons

 Minimal upfront investment in personnel and   Per loan cost and the inability to get to a marginal 
technology cost number
 Ability to get servicing operations up and running   Makes lower balance loan less profitable land 
quickly changes break even point
 Ability to make use of best practices of subservicer   Additional cost of vendor oversight and in house 
experiences and implied compliance with National  servicing full time employees
Servicing Standards
 A vendor is interacting with customers versus own 
 Ability to exit investment in servicing quickly due to  personnel and therefore limits ability to control 
lack of infrastructure borrower experience
 Contracts vary, but often split late fees 50/50

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In House Servicing Model
In House Pros In House Cons

 Absolute ability to control the borrower experience   Elevated initial (and ongoing) costs of technology 
and interaction and personnel
 Ability to make use of marginal costs once   Significant investment in policies and procedures to 
adequate servicing scale is achieved ensure compliance with National Servicing 
 Greater ability to control cross‐sell and refinancing 
Standards
opportunities  Headcount and operations make maintaining scale 
 Ability to earn 100% of fees associated with 
critical and therefore less ability to sell servicing 
without materially adversely impacting financial 
subservicing including late fees and ancillary
ratios

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Fair Value Accounting Designation: Level 3 Asset

MSRs are generally Classified as a Level 3 Asset:

Level 1 Asset
 Transparent and readily available quoted market prices
 EX: Equity Stocks

Level 2 Asset
 Lack of readily available quoted market price (but may have market inputs)
 Involves more complex modeling than Level 1 Asset
 Ex: Interest Rate Swaps

Level 3 Asset
 Illiquid Market
 Involves complex modeling and reliance on assumptions and estimates that
management must support
 Ex: MSRs

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Accounting Election for MSRs
After the MSRs are recognized initially at Fair Value, companies must elect
either Fair Value or Lower of Cost or Market (LOCOM)
Pros of LOCOM
Pros of Fair Value
When rates rise and MSR values increase, permits the servicer to sell
Balance sheet value for the MSR value represents market at all times the MSR asset for a gain (as the asset cannot be written up above the
initial capitalized amount)
Decay/amortization is determined based on actual prepayments vs a
prepayment model based approach that is used for LOCOM In general, makes amortization expense easier to model and project
based on the cash flows
Cons of Fair Value
Cons of LOCOM
Likely to introduce volatility to income statement due to writing
up/down the asset; may necessitate hedging the MSR value changes Impairment (book value being higher than market value) can occur
suddenly and must be tested for each quarter/year end
Increases the volatility of decay/amortization as the overall basis (MSR
asset) can change dramatically MSR value on the balance sheet reflects the cost basis and may
deviate greatly from actual market value (especially in a rising rate
One time irrevocable decision to elect fair value environment)

Amortization expense is determined by future modeled prepayments

5.12.16 Private and Confidential

MSR Valuation
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Modeling Approach

Two types of valuation approaches are common for MSRs: Static and Option Adjusted Spreads
(“OAS”). Each has its advantages and disadvantages:

Static Valuation OAS Valuation
Remains the most common technique Common among top 25 servicers, but not all have 
adopted
Used by the majority of non top 25 servicers
Discount rate (OAS) varies over time
Discount rate remains constant, incorporates:
required rate of return Assumes interest rates are random and change over 
time
premium for market liquidity
operational risk More complex and dynamic, requires significantly more 
computer processing

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MSR Valuation Components Summary
Revenues Expenses

Servicing costs Prepayment speeds are a key driver

Service fee revenue behind servicing values (on performing or new 
Additional costs for delinquent loans production):
Escrow float earnings
and foreclosures The longer a performing MSR is held in the 
P&I and payoff float earnings portfolio, the more revenue will be received
Advances on delinquent P&I and
Ancillary income (ex: late fees, escrow payments As interest rates rise, prepayment 
modification income, optional
Interest owed on escrow accounts (ie speeds will slow, that increases the 
insurance, etc)
CA,CT, MA, ME, NY, OR, RI, UT, VT & duration and resulting value of the MSR
Predicted Prepayments WI)
Conversely, as interest rates drop, 
Interest owed on early payoffs
prepayment speeds will rise, which will 
Voluntary payoffs and refinances (unique to scheduled/scheduled
products) decrease the life and value of the MSR
Involuntary payoffs (foreclosures)

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Support for MSR Valuation
Valuation of the MSR portfolio must be supported by documentation that includes the policies and procedures for the establishment of the fair
value and should include:
Modeled vs. Actual Cash Flow Analysis
Quarterly review of valuations (and impairment test if required)
One Month
Comparison of MSR valuation to relevant market sources including: Modeled  Actual Variance

External market data Gross Service Fee Revenue $229,003 $212,205 ($16,798)

Prepaid Interest Lost                  ‐                 ‐
Market trades
Net Service Fee Revenue $229,003 $212,205 ($16,798)
Third party valuations
Net Float Income $5,424 $4,975 ($449)
Survey data
Ancillary Income* $11,452 $9,500 ($1,952)
Reconciliation of expected vs. actual cash flows (see figure to the right) Total Ancillary & Late Fee Income $11,452 $9,500 ($1,952)

Detailed support for changes in the valuation process Base Cost to Service ($21,299) ($25,250) ($3,951)
Deliquency/Foreclosure Costs ($537) ($757) ($220)
Total Cost to Service ($21,836) ($26,007) ($4,171)
Support for prepayment estimates used in determination of fair value
Net Income $224,043 $200,673 ($23,370)

*Phoenix model includes late fee income in ancillary income

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Sample MSR Valuation Report
Agency Type Term NoteRange Loans UPB AvgBal IntRate SvcFee Age Price$ Price% Mult Yield Cost Setup AncInc CCY Vol CPR PSA* Invol CDR AvgLifeCPR AvgLifeYrs
FNMA MBS FIXED
FNMA MBS FIXED
30 4.501 -> 4.750
30 4.751 -> 5.000
142
611
40,619,874 286,055
160,540,625 262,751
3.157 0.2500
3.380 0.2500
15 479,478 1.1804 4.7216 9.50
27 1,727,668 1.0762 4.3046 9.50
60
60
7
7
45
45
3.528
3.528
7.85
9.62
131
160
0.40
0.40
7.89
9.85
8.3
7.3 Independent
FNMA MBS FIXED
FNMA MBS FIXED
30 5.001 -> 5.250
30 5.251 -> 5.500
715
369
162,089,621 226,699
81,965,689 222,129
3.587 0.2500
3.815 0.2500
28 1,583,318 0.9768 3.9073 9.50
35 732,617 0.8938 3.5752 9.50
60
60
7
7
45
45
3.528
3.528
11.45
13.31
191
222
0.39
0.38
11.81
13.75
6.5
5.8
valuation by
FNMA MBS FIXED
FNMA MBS FIXED
30 5.501 -> 5.750
30 5.751 -> 6.000
96
21
18,923,835 197,123
4,069,580 193,790
4.057 0.2500
4.253 0.2500
50
77
154,436 0.8161 3.2644 9.50
29,349 0.7212 2.8847 9.50
60
60
7
7
45
45
3.528
3.528
15.10
17.96
252
299
0.37
0.35
15.60
18.52
5.2
4.5 a 3rd party
FNMA MBS FIXED 30 <= 4.5 46 12,071,771 262,430 2.933 0.2500 3 151,979 1.2590 5.0359 9.50 60 7 45 3.528 6.51 109 0.41 6.36
with
9.1

** ** ** ** 2,000 480,280,995 240,140 3.528 0.2500 0 4,858,846 1.0117 4.0467 9.50 60 7 45 3.528 10.92 182 0.39 11.23
knowledge
6.8

11.31

Adv
of MSR pricing and
Agency Type Term NoteRange
PI
Days Ppay Days
Days
Lost
Avg
Esc IOE
Delq
30% Delq 60%
Delq
90%
D30 D60
FC% Cost Cost
D90
Cost
FC Float
Cost Earn %
Escrow Cost
Earn % %
activity is viewed as a
FNMA MBS FIXED
FNMA MBS FIXED
30 4.501 -> 4.750
30 4.751 -> 5.000
13
13
30
30
12
12
0.65
0.65
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
100 200
100 200
500
500
750
750
0.47
0.47
0.81
0.81
0.97
0.97 key component in
validating the fair
FNMA MBS FIXED 30 5.001 -> 5.250 13 30 12 0.65 0.00 0.00 0.00 0.00 0.00 100 200 500 750 0.47 0.81 0.97
FNMA MBS FIXED 30 5.251 -> 5.500 13 30 12 0.65 0.00 0.00 0.00 0.00 0.00 100 200 500 750 0.47 0.81 0.97
FNMA MBS FIXED 30 5.501 -> 5.750 13 30 12 0.65 0.00 0.00 0.00 0.00 0.00 100 200 500 750 0.47 0.81 0.97
FNMA MBS FIXED
FNMA MBS FIXED
30 5.751 -> 6.000
30 <= 4.5
13
13
30
30
12
12
0.65
0.65
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
100 200
100 200
500
500
750
750
0.47
0.47
0.81
0.81
0.97
0.97
value of MSR
** ** ** ** 13 30 12 0.65 0.00 0.00 0.00 0.00 0.00 100 200 500 750 0.47 0.81 0.97
portfolios

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Sample Economic MSR Retained Grids
Customized using originator’s
economics
Adjusted for balance, state,
escrow, product, fico, ltv,
interest rate
Updated monthly, quarterly,
or semi‐annually
Used in a variety of ways:
Capitalization
Hold/Sell decisions
Pricing loans
Buying MSR

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Assumption Documentation
The documentation of the assumptions used in the valuation of an MSR portfolio
is an on‐going process and best practices include comparing the internal to
Internal 9/30  9/30  external assumptions, including:
Product Assumption Valuation  Valuation  Valuation
(9/30) External External   Clear documentation around the source of assumptions, frequency of
(1) (2)
updates, last update and next scheduled update (update does not
FNMA /FHLMC  CPR (Life) 10.2 9.1 12.4
30 Year Fixed necessarily mean change)
FNMA / FHLMC  CPR (Life) 14.6 12.2 16  Documentation of the parallel testing of new assumptions
15 Year Fixed
GNMA 30 Year  CPR (Life) 11.1 11.5 12.2  Documentation of not only the final assumptions, but also other items
Fixed considered and tested but not necessarily implemented
GNMA 15 Year  CPR (Life) 16.8 13.7 18.4  Helps to answer auditor/regulator “what if” questions
Fixed
 Documentation of the approval process for new assumptions
 Involves complex modeling and reliance on assumptions and estimates that
management must support
 At a minimum, should include prepayment speeds, discount rate (OAS), cost
to service, ancillary and escrow earnings rate
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Assumption Documentation, cont.
Internal Valuation  Internal 12 Month External Valuation (1)   External Valuation (2)
Product Assumption 9/30 Average 12 Month Range 12 Month Range

FNMA /FHLMC 30 Year Fixed CPR (Life) 10.2 10.5 9.5 to 11.5 10 to 12

FNMA / FHLMC 15 Year Fixed CPR (Life) 14.6 13.9 11.5 to 12.5 15 to 16

GNMA 30 Year Fixed CPR (Life) 11.1 10.5 10 to 12 10 to 12

GNMA 15 Year Fixed CPR (Life) 16.8 14.3 11 to 15 13 to 18

In addition to tracking the assumptions, best practice is to develop a history of the ranges used
both internally and externally

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Key Assumption: Prepayment Speeds

The prepayment speed estimate is a key assumption used in the determination of the fair value for MSRs, therefore additional
scrutiny and documentation is required.

Documentation of the source of prepayment estimate and calibration process

Tolerances around modeled to actual speeds

Historical performance of modeled to actual speeds

Common sources of prepayment estimates include:

Industry recognized models such as Andrew Davidson (“AD‐CO”) or the AFT Model (owned by Black Knight)

Prepayment models require constant monitoring and calibration

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Prepayment Analysis (Historical)

A variety of sources now exist to obtain actual servicer level prepayment speeds. Best practices
include comparing company specific prepayments to the total cohort and a consistent subset of
peers.

Life CPRS
Product Vintage Company Peer 1 Peer 2  Peer 3  Peer 4 Peer 5 Peer 6 Total Cohort
FNMA 3.0 2015 3.3 3.1 3.4 3.3 3.4 3.8 2.6 3.2
2014 6.2 6.0 6.3 8.7 9.0 9.3 5.8 6.4
2013 5.4 5.2 5.5 7.9 8.2 8.5 4.6 5.1

FNMA 3.5 2015 3.7 4.8 3.8 3.8 4.8 3.8 4.8 4.2
2014 12.3 12.1 11.7 11.7 12.1 11.7 12.1 11.8
2013 8.7 7.9 7.7 7.7 7.9 7.7 7.9 7.7

FNMA 4.0 2015 6.0 6.2 5.9 3.5 3.2 2.9 2.6 5.4
2014 14.9 15.1 14.8 12.4 12.1 11.8 11.5 14.4
2013 15.0 15.2 14.9 12.5 12.2 11.9 11.6 14.1

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Tracking Prepayments

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Implementation of New Assumptions

The implementation and timing of new assumptions in the official valuation must be considered:

For entities that hedge the MSR asset, the change in assumptions may impact the base value, but more importantly the
shock profile
Providing adequate time to test and understand the profile changes is critical
The interplay of assumption changes as rates move and more time to test is better to understand the impact (both
expected and unexpected)

Changing the assumptions can have a ripple impact on the production side of the business as the SRP premiums are likely
impacted
Providing adequate time to implement changes to the SRP helps make the transition more seamless

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MSR Market Overview
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Historical Perspective – MSR Market

 Mortgage servicing rights (MSRs) were actively   Servicing transaction market was active in 
traded between banks both bulk and flow through mid 2008
 Only purchased MSRs were recognized  

The 1990s
Servicing was viewed as “core product” by 
on the balance sheet as an asset banks
 MSR sale transactions occurred 
between banks to recognize stored 
 Large bank aggregators became more and 
more dominant buyers 
value (gain)
 Aggregators attempted to force 
 Originated MSRs became an on balance sheet  sellers into a correspondent 
asset during the mid 1990’s relationship
 No longer needed to sell MSRs to   Fair value accounting option for MSRs was 

The 2000s
recognize MSR gains
implemented
 Buyers of MSRs were typically banks
 Refinance boom of 2002/2003 followed by 
 Emergence of the flow / co‐issue market (versus  several years of “product innovation”
traditional bulk transactions)
 Financial crisis struck in late 2008

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Historical Perspective – MSR Market

 Very quiet period for MSR transactions with very   MSR market has returned with emergence 
few MSR trades  of new buyers

through first half 
 MSR portfolios that were “sold” occurred at   Private equity funded buyers dominate the 

Late 2008 

of 2012
distressed prices market
 Flow values dipped below a 3 multiple of   Significant demand for new production
servicing fee for new Fannie Mae/ Freddie Mac 
30 year fixed rate production
 Bulk market for recent originations or legacy 
servicing is active
 Internal focus by servicers on “legacy servicing 
 Originators that traditionally delivered to 
issues”
the aggregators, who are now delivering to 

Second half of 
2012 through 
Aggregators backed away from broker and  today the agencies, have become either investors 
correspondent production channels in servicing or flow sellers of servicing

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 32
Servicing Portfolio Trends

the
Non banks are
fastest growing
servicers year over year

Due to impact of
legacy/delinquent servicing
and BASEL III concerns, many
reduced
banks have
greatly their MSR
portfolios

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 33
Selling MSRs
Management should periodically review, validate and document its decision to retain or sell servicing as conditions can
change rapidly and have a material impact on the MSR value

Factors that influence a decision to retain versus sell include:

Market prices
Internal return metrics
Management’s interest rate tolerance
Strategic considerations including the use of internal versus external servicers
Capital management concerns

Servicing can be sold either on a bulk or flow basis. Each transaction type comes with a differetn set of operational and
interest rate risks that must be understood by management

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 34
Flow vs. Bulk Transactions
Advantages of Flow/Co-Issue Transaction Advantages of Bulk Transaction

 Monthly sales reduce interest rate risk; there is a lag, but   Known characteristics are simpler to price
production is following current coupon
 Buyer has ability to gain scale immediately
 Buyer can protect against interest rate movements in 
 Seller can raise significant cash at one time
the pricing grid
 Seller can price in expected MSR price
 Buyer can more easily plan for a one time cash outlay

 Sellers avoid having to sell large portfolios for cash in 
 Seller can arbitrage in times of rising interest rates
falling interest rate environments  Transaction structure is simpler for both sides
 Significant upfront effort and expense fosters long‐term   Seller can strategically dispose of particular segments of a 
relationships portfolio if a suitable buyer can be found (ie, particular states 
 Requires small initial cash outlay for buyer
or products, delinquent loans, etc)

 Avoids boarding and de‐boarding fees

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 35
MSR Market Overview 2016
2015 brought about changes in the MSR market that are accelerating in 2016:

2015 reflected a balanced market between buyer demand and seller supply

2016 market favors buyers as demand wanes while supply remains steady
Several PE buyers have retrenched pricing and/or exited/paused acquisitions
Interest rate risk and market volatility along with subdues capital raising prospects among PE firms have decreased buyer
appetite
GNMA liquidity declined sharply in the second half of 2015 and remains challenging

Liquidity is present, but overall deal success rate continues to decline from 2014/15 levels
Realistic pricing expectations are imperative
Bid/ask spreads have widened to the 5‐10bp range leading to many failed trades
Generally only mortgage bankers needing cash are completing deals in today’s market

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 36
MSR Market Overview 2016
Buyer demand dependent on counterparty, deal size and loan‐level attributes

Flow buyers paying more attention to current relationships and less aggressive bidding new deals

Buyers revisiting returns on 2015 deliveries and adjusting models and grids to better match expectations going
forward

A wider dispersion of bid levels across all MSR deal classes

MSR financing continues to create an alternative source of generating cash (vs an outright sale)

Some (large )sellers have had success selling the MSR but subserving for the buyer to retain economies of scale on their
platform; achieving sale treatment is a hurdle

Excess Servicing Fee Transactions (IO Strip Sale) – selling a portion of the 25bps servicing strip to an investor

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 37
Summary Observations for Holders & Sellers
Summary for Holders of MSR Summary for Sellers of MSR

 Valuation Process: As a result of an active MSR market, the   Type of Transaction: Understanding the benefits and risks of co‐

demand for valuations (often multiple valuations) by auditors and  issue/flow vs bulk transactions and integrations within a long‐term 
regulators to ensure values are calibrated appropriately to the  strategy
most recent market activity has increased substantially
 Sale Selection Process: Particularly relevant for bulks, 
 Managing the MSR Asset: In addition to greater emphasis on the  understanding the risks of what is to be sold vs retained is critical. 
valuation process, the overall management of the MSR asset and  Investor/guarantor approvals are also important to understand.
documentation of assumptions, oversight and valuation process 
including vendor management  Market Conditions: Buy side demand is not consistent. 
Understanding buyer appetite and strategies as well as how to slot 
 Servicing Compliance: Active monitoring including an annual audit  deals in the market has become more critical
of the subservicer is required and must be performed on a 
periodic basis to ensure initial and ongoing compliance with   Data: The data requirements vary across buyers and understanding 
servicing standards the impact on the overall price and execution is critical

 Data: Quality of images and completeness of files along with   Bid Analysis: The difference between the gross and net price is the 

managing the document custodian are important to reduce risk of  initial layer of the analysis, but within a co‐issue, a number of 
losses from repurchase requests additional factors must be included in order to determine the best 
execution

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Historic MSR Flow Pricing: Conventional

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 39
Historic MSR Flow Pricing: Government

5.12.16 Private and Confidential

Phoenix Team and Contact
 Brett H. Schaffer Dean H. DeMeritte

President Executive Vice President

Brett H. Schaffer, President of Phoenix Capital, Inc. and Phoenix Analytic Dean H. DeMeritte, Executive Vice President of Phoenix Capital, Inc. and
Services, Inc., has over 30 years of mortgage banking experience including Phoenix Analytic Services, Inc., has over 30 years in the mortgage banking
over 25 years in the mortgage servicing brokerage industry. During this industry and has been with Phoenix for over fifteen years. His responsibilities
period, Brett has managed several hundred bulk and flow servicing at Phoenix include management of the Transaction Advisory and Transaction
transactions amounting to over a trillion dollars in principal balance. Management Teams, as well as managing all strategic and high level analytics
performed, including 3rd party MTM and valuing servicing rights for
Brett co‐founded Phoenix Capital, Inc. and Phoenix Analytic Services, Inc. and sales/acquisitions.
has been instrumental in developing both companies into top‐tier brokerage,
analytic, and consulting firms. Brett has developed a solid and long‐term Prior to Phoenix, he was with Fleet Mortgage as Vice President of Portfolio
client base with his reputation for maintaining his clients’ objectives first and Transactions. He has also worked at Harbor Financial Mortgage Corp., Banc
emphasizing a level‐headed approach to negotiating transactions while One Mortgage, Banc Plus Mortgage, Chemical Mortgage and J.I. Kislak
pushing Phoenix clients to deal practically with market realities in managing Mortgage. His expertise includes buying and selling mortgage servicing
the mortgage servicing right (MSR) asset. Prior to co‐founding Phoenix rights, contract negotiations, company acquisitions, strategic planning,
Capital, Inc., Brett spent four years with United Financial, Inc. and five years finance and accounting. In addition, he was a principal with a mortgage
with John S. Hopkins, Inc., both servicing brokerage firms. production company.
Brett began his career in Secondary Marketing with Prudential Home Dean has a B.S. in marketing from the University of Maryland and has an
Mortgage in 1985 after graduating from the University of Virginia. MBA with a concentration in Finance from Duke University.
 Stephen Fleming, Senior Vice President, Phoenix Capital, Inc.
Stephen B. Fleming, Senior Vice President, joined the Phoenix team in 2011 and helps lead the strategic business development, client
management and industry relations groups. Stephen’s responsibilities span bulk and flow servicing transactions, MSR analytics including best
execution engagements, and M&A activity. Prior to joining Phoenix, Stephen was a Senior Credit Trader at Fannie Mae in Washington DC, working
on the both the bulk and flow Pricing Strategy teams. He began his career at JP Morgan Chase as an Assistant Vice President. Stephen is a
frequent industry speaker, including various MBA Conferences and the Fannie Mae Lender Forums. In addition to being a Georgetown University
MBA honors graduate, Stephen holds a Finance and Accounting Certification from UPenn's Wharton School of Business and a BA degree in
Mathematics and Economics from the College of the Holy Cross.

Rod Schluter, Senior Vice President, Phoenix Capital, Inc.

Rodney L. Schluter, Senior Vice President, joined the Phoenix family in 2013. Rod’s primary duties at PCI include advising on the sale, acquisition,
and valuation of MSR portfolios, with emphasis on new client development and management. Rod also has business development and cross
marketing strategy duties with other companies in the Phoenix family, including Phoenix Analytic Services, and MSR valuation and analytics firm,
Phoenix Asset Management, and REO and short sale service provider, Phoenix Whole Loan Solutions, an active investor in whole loans and
Phoenix Collateral Advisors, an operational and loan‐level due diligence firm. Previously, Rod worked at United Financial, Matrix Bancorp and
MountainView Capital where he was responsible for the strategic management of MSR portfolios on behalf of his clients, as well as the sale and
acquisition of residential whole loan portfolios. Rod brings over 22 years of mortgage banking experience to the Phoenix companies and is a
graduate of the University of Northern Colorado with a degree in Finance.

Seth D. Sprague, CMB, Senior Vice President, Phoenix Capital, Inc.

Seth D. Sprague, CMB, Senior Vice President, has been with Phoenix since early 2013 after more than ten years with SunTrust Mortgage managing
their mortgage servicing rights portfolio valuation process as well as their periodic MSR transaction activity. Seth’s primary duties at Phoenix
include managing bulk and flow MSR transactions, advising on analytic and valuation strategies, and participating in strategic business
development activities as the MSR market continues to evolve. Seth has a total of over 17 years of mortgage banking and servicing valuation
experience at a variety of firms including SunTrust Mortgage, Bank of America Mortgage, United Financial / Matrix Financial and KPMG LLP. Seth
is a frequent speaker with the MBA’s School of Mortgage Banking Program and holds an MBA from the University of Colorado – Denver and an
undergraduate degree from the University of Richmond with a concentration in Accounting.
 Brady DuPuis, Senior Vice President, Phoenix Capital, Inc.
Brady J. DuPuis, Senior Vice President, has been with Phoenix for more than ten years where he leads the Transaction Management Team for PCI
after serving as an senior analyst for Phoenix Analytic Services, Inc., where he focused on mark‐to‐market valuations, modeling servicing release
premium schedules, and performing various detailed analyses of flow and bulk servicing transactions for both buyers and sellers of MSRs. Brady
has extensive experience in valuing all types of mortgage servicing products, including agency, non‐agency, subprime, scratch and dent, and
reverse mortgages as well as experience using the top industry valuation software and the ADCO prepayment model. Brady brings in‐depth
experience and understanding of the valuation process to the client management team. Brady has an MBA from the University of Colorado –
Denver and an undergraduate degree in Business Administration from Fort Lewis College.

Erin Gilbride, Senior Vice President, Phoenix Capital, Inc.

Erin L. Gilbride, Senior Vice President, joined Phoenix in 2005 and is currently a senior member of Transaction Advisory Team after spending the
majority of her tenure with Phoenix leading the Transaction Management Team for PCI , including comprehensive bid analysis of gross vs. net
price encompassing key economic terms, negotiation of bid letter and purchase and sale contracts, optimization of sales strategy and facilitation
of marketing process. Erin's expertise in all functions associated with comprehensive deal management has been instrumental in developing
Phoenix’s industry leading Transaction Management Team. Erin’s ability to innovate creative deal terms in a difficult trading environment to satisfy
both buyer and seller has led to her reputation as a trusted client manager. Erin has a BS in Management Information Systems and an MBA from
Ohio University.

Jeff Boyd, Senior Vice President Phoenix Analytics Services, Inc.

Jeffrey S. Boyd, Senior Vice President, leads the day‐to‐day management of Phoenix Analytic Services, Inc. (PAS) and has been with PAS for over
fourteen years. In addition to the training and oversight of all PAS staff, Jeff is directly involved with all analytic‐related engagements. His primary
responsibilities include servicing portfolio valuations (mark‐to‐markets), acquisition analyses, servicing released premium (SRP) schedule
development, economic hold/sell analysis, FASB 140 accounting and impairment outsourcing services and the modeling of bulk and flow servicing
transactions. Prior to joining Phoenix, he worked with Commercial Federal. He holds a BS in Finance from the University of Colorado.
 Kathryn M. Ferriman, Vice President, Phoenix Analytics Services, Inc.

Kathryn M. Ferriman, Vice President of Phoenix Analytic Services, Inc., joined PAS in 2007. Her primary responsibilities include the management
and training of PAS analysts, as well as overseeing MSR portfolio valuation and MSR aAccounting outsourcing services. She is also actively involved
in the valuation of bulk transactions. Kathryn has a B.S.B.A. in International Business and an M.A. with a concentration in Statistics, both from the
University of Denver.

John Burnett, President, Phoenix Collateral Advisors, Inc.

John Burrnett, President of Phoenix Collateral Advisors, has 20 years of mortgage banking and servicing experience. During the period, John has
overseen the servicing management of hundreds of thousands of loans, and more than ten thousand real estate liquidations. John has worked
closely with Wall Street Investment firms and GSEs to execute loan retention and liquidation strategies. Throughout John’s career, he has focused
on providing clients with asset level solutions rather than task management metrics. Prior to joining the Phoenix Family of Companies, John held
executive and senior leadership positions with Integrated Asset Services, Statebridge Company, IBM/Seterus and Wilshire Credit
Corporation/Merrill Lynch.
 Don’t hesitate to contact us!

Jeff Boyd: 303‐539‐7229 Erin Gilbride: 303‐539‐7241
jboyd@phnxcap.com egilbride@phnxcap.com

Phoenix Capital, Inc.

999 Eighteenth Street, Suite 1400
Denver, CO 80202
Phone: 303.892.7070
Email: phnxinfo@phnxcap.com