Due Diligence Portfolio Review

Valuations

• Cash Flow Model

  EDGE's team of consultants develops a comprehensive MSR cash flow model from the ground up, incorporating insights from customer input and market data. Our valuation methodology commonly encompasses a standardized set of mark-to-market cash flow assumptions, which mirror those employed by market participants to derive a mid-market bid for a portfolio. When substantiated by evidence and rationale, Incenter possesses the capacity to integrate a client's internal economic parameters for MSR valuations. This capability becomes particularly relevant in scenarios such as mark-to-model valuation approaches.

• Option Adjusted Spread (OAS)

  EDGE employs Option-Adjusted Spread (OAS) to formulate discount factors for the cash flow projections within the model. These OAS values are deduced from real, executed MSR transactions (both bulk and flow) to establish an OAS assignment rooted in market dynamics, intricately aligned with distinct portfolio attributes. While these OAS assignments can be fine-tuned to accommodate specific investors' internal hurdle rates or Return on Equity (ROE), they predominantly mirror discount factors at the market level.

• Prepayment Model

  EDGE may initially employs a prepayment model calibrated to industry-standard prepayment speeds for the purpose of the initial valuation. These speeds may incorporate adjustments for prepayment based on factors like state variations or origination channels. Recognizing the distinctive servicing tactics and portfolio performance metrics of each servicer, Incenter customizes the prepayment model for each individual client as time progresses, considering their real-world prepayment rates. On a monthly cadence, Incenter revises its prepayment model to account for evolving primary rate trends and other assumptions furnished by our prepayment model vendor.

MSR Hedging

• Ginnie Mae

  EDGE actively engages in Ginnie Mae MSR trading and possesses the capability to integrate highly specific economic components into the hedge construction process. This ensures accurate modeling of the authentic MSR exposure for our clients.

• Basic Approach

  The optimal strategies for hedging the MSR asset involve addressing curve risk and mortgage basis. Incenter's approach to MSR asset valuation is founded on a libor/swap-based curve. By leveraging swap-based instruments, our valuation framework closely replicates the fundamental curve underlying the asset, which aligns with the predominant exposure areas. This approach enhances the effectiveness and efficiency of our hedging strategies.

• Risk Measurement

  Quantifying the risk associated with an MSR portfolio necessitates an intricate examination of all Key Rate Durations, which stem from our Option-Adjusted Spread (OAS) modeling of the asset. Our OAS model intricately integrates 256 trajectories through the polypaths model, supplemented by prepayment speeds extracted from the Espiel (AFT) prepay model that's fine-tuned to both client portfolios and broader market transactions.

Analytics

• Analytics Modeling

  We employ an extensive array of industry-standard MSR valuation tools, encompassing static, stochastic (Option-Adjusted Spread or OAS), and hybrid modeling methodologies.

• Customized Solutions

  As an illustration, we have the capacity to conduct in-depth asset analyses concerning key rate exposure. Additionally, we can perform essential assumption stress tests that encompass a range of factors such as servicing costs, prepayment speeds, yields, spread, and discount rates.

• Trade Reporting & Compliance

  Our analytics team provides comprehensive support to our clients by producing a diverse range of reports tailored for various stakeholders. These reports are utilized by MSR managers, counterparties, internal and external auditors, as well as regulatory bodies.