Mortgage Servicing Rights Valuation Updates – March 31, 2026

Mortgage servicing rights (“MSRs”) remain one of the few assets that can provide both recurring cash flow and a natural partial hedge against origination cyclicality. This report primarily focuses on conventional, fixed‑rate, residential MSRs and how values have changed through March 31, 2026. While origination volumes remain constrained by inventory and affordability challenges, MSR values have demonstrated notable resilience with a higher-for-longer interest rate environment outlook.

This article highlights key MSR asset value trends shaping the market and outlines what institutions should monitor as the year progresses.

History Shaping Today’s Market

Today’s mortgage market remains heavily shaped by the increasing strain on housing supply, affordability trends, and the unprecedented interest rate environment of 2020 and 2021. Realtor.com¹ estimates that the U.S. housing market faced a supply gap of more than 4 million homes in 2025, reflecting long‑standing construction constraints and structural barriers to new supply. Tariffs, labor shortages, and economic uncertainty continue to weigh on builders as they consider costs and demand conditions. Under an optimistic scenario, increasing the pace of building 50% from 2025 and assuming pent-up demand fully dissipates, Realtor.com estimates it would take approximately seven years to eliminate the current housing deficit.

Supply strain is supporting continued home price appreciation despite softening conditions as the volatility in interest rates is impacting buyer affordability. As reported by the Federal Housing Finance Agency (“FHFA”), U.S. purchase-only HPI² (seasonally adjusted, nominal) increased only 1.6% in 2025, a notable decrease as compared to 5.2% growth in 2024.

In addition to supply strain, in 2020 and 2021, record low mortgage rates drove a historic wave of refinancing activity, allowing millions of borrowers to lock in long term financing at rates well below 4.0%. As interest rates reset sharply higher in subsequent years, those borrowers have largely remained in place, effectively “rate-locked,” unwilling to give up low-cost financing for materially higher monthly payments.

As shown in the following graph, U.S. 30-year mortgage rates are closely linked to the 10‑year Treasury yield. This relationship reflects a beta of 1.22 over the last decade. Mortgage rates are reported by Freddie Mac³ and Treasury rates are sourced from Bloomberg.

With fewer borrowers refinancing or selling, and amidst the ongoing housing supply deficit, loan origination volumes remain constrained, prepayment speeds have slowed, and existing mortgage portfolios are lasting longer than in prior rate cycles. The following graph details large bank consumer mortgage new origination volumes over the last decade in billions of dollars. As shown, recent origination volumes remain suppressed as compared to pre-pandemic levels.

At the same time, loans originated after interest rates began rising in 2023 are expected to behave very differently. These newer vintages were originated at materially higher interest rates, peaking at 7.8% in October 2023. Therefore, these loans are more sensitive to rate declines in the current environment. Even modest downward movements in mortgage rates can create enough refinancing incentives for borrowers to act, especially as 30-year rates fell below a notable 6.0% milestone at the end of February 2026 for the first time since September 2022. This highlighted the increasingly bifurcated prepayment risk that exists: legacy portfolios from 2020 and 2021 remain largely insulated from rate‑driven activity, while post‑2022 originations represent a more rate‑responsive segment of the market. This dynamic is becoming an important consideration in MSR valuations and hedging strategies.

Industry Projections

Looking ahead through 2027, the Mortgage Bankers Association⁴ (“MBA”) projects 30-year fixed mortgage rates to remain relatively flat, fluctuating between 6.1% and 6.3%. This is consistent with Intercontinental Exchange, Inc. (“ICE”) mortgage rate futures⁵ which suggest modest near-term rate pressure, with some improvement priced in for late spring and summer. The following graph reflects 2025 through Q1 2026 historic mortgage rates and the 10‑year Treasury yield as well as the forecasted quarterly average figures reported by the MBA.

Interest rates and resulting prepayment expectations remain the most influential driver of MSR value. The fluctuating interest rate environment has led to volatility in values on higher interest rate loans. Furthermore, recognizing the relationship between treasury rates and mortgage rates, Wilary Winn’s discount rate methodology is explicitly tied to movements in the 5‑ and 10‑year U.S. Treasury yield curves. Typically, this movement serves as a partial offset to the impact of changing prepayment speeds. From an accounting and risk management perspective, this reinforces the importance of regularly reviewing valuation assumptions and stress testing prepayment scenarios while back testing actual portfolio performance.

Q1 MSR Update

The following graph shows changes in prepayment speeds since 2019 and the impact on MSR values based on a sample 30-year portfolio, broken down into interest rate cohorts. In 2020, when mortgage rates hit historic lows, prepayment speeds peaked and MSR values were significantly compressed. By 2023, the rise in rates led to significant increases in MSR values as prepayment expectations slowed, especially on historically low-interest rate loans originated in 2020 and 2021.

By year-end 2025, with mortgage rates declining, prepayment expectations increased, suppressing MSR values once again. As mentioned, higher interest rate loans (> 6.00%) experienced more volatility as values decreased by over 0.20% between June and December, whereas lower interest rate loans (<= 4.00% and 4.00% – 6.00%) saw less than 0.01% decrease in value. While interest rates continued to fall through February 2026, in March, mortgage rates reversed course and increased 0.40% above year-end levels, reducing prepayment expectations on higher interest rate loans, thus helping values to rebound slightly. Lower interest rate loan values continue to show minimal impact from the recent fluctuations, as rates stay above the 6.0% threshold.

With rates projected to fluctuate between 6.00% and 6.50% on average, the following shock analysis shows the estimated impact on MSR values by tranche breakout, assuming rates adjust + / – 50 basis points from current market rates as of March 31, 2026. As expected, values exhibit negative convexity with more value lost if rates fall as compared to the value gained if rates rise. If rates fall, > 6.00% mortgages are at the greatest risk of value loss. Institutions that elect fair value accounting for recognizing the MSR asset and implement effective hedging strategies can reduce economic volatility in their income statement. This approach requires increased governance, controls, and documentation.

Additional Considerations

As mentioned, the current fluctuating rate environment also affects discount rates under Wilary Winn’s methodology. Aligning with the approximate average lives of the MSRs, we average the 5- and 10-year Treasury rates plus a risk-premium. The following graph shows how conventional fixed-rate discount rates have fluctuated since 2019, as compared to changes in prepayment speeds.

The relationship between discount rates and prepayment speeds for the 30‑year MSR portfolio exhibits an, albeit imperfect, inverse relationship. Additionally, Wilary Winn implements a 9.0% floor discount rate on residential MSRs. We believe a market participant would require a minimum yield of 9.0% to be willing to purchase the asset. With treasury rates decreasing to historic lows beginning in 2020, discount rates sustained floor values through Q2 2022. As many borrowers refinanced at historic low interest rates during that time, and with rates beginning to increase, prepayment speeds decreased sharply, falling as low as 5.5% by Q2 2023. With the continued increase in treasury rates, discount rates peaked at 10.0% by December 2024 but eased in 2025 as rates eased. Between December 31, 2025, and March 31, 2026, discount rates increased slightly, offsetting some of the benefit from slower prepayment speeds.

Additionally, differences in portfolio composition, such as conventional versus GNMA exposure, seasoning, and borrower credit characteristics, are increasingly important. Similar to voluntary prepayments, involuntary prepayments (default) cease all future cashflows and are therefore a detriment to MSR asset values. FHA loans have accounted for more than 80% of the recent increase in delinquencies, with seriously past due FHA loan volumes up by more than 40% according to ICE in the Mortgage Monitor Report⁶ for April 2026.

Recapture

In addition, recapture capabilities continue to play a meaningful role in economic value to institutions, particularly as lenders focus on retaining customers in a low-volume production environment. Tight affordability keeps borrowers highly focused on cost when selecting a mortgage lender. As refinance incentives largely benefit more recently originated loans, fourth-quarter refinance volumes were driven largely by 2024 (27%) and 2025 borrowers (15%) with relatively strong retention rates. According to ICE in the Mortgage Monitor Report for March 2026, servicers retained more than half of borrowers refinancing out of 2025 vintage loans and 45% of borrowers refinancing out of 2024 vintage loans. Retention typically declines as loans age; recent vintages saw a 6%-24% drop from year one to year five. FHA and VA loans saw the strongest retention in the fourth quarter at 39%, while portfolio loans came in at 32%, and FNMA/FHLMC loans at 30%.

Recent discussions around MSR valuations under GAAP have increasingly centered on the appropriate treatment of recapture assumptions within fair value measurements. Under GAAP, the fair value of an MSR is intended to represent the price that would be received in an orderly transaction between market participants, rather than the economic value to a specific servicer. Recapture is generally not considered GAAP because it is viewed as a future business development opportunity rather than a contractual cash flow derived from existing servicing rights and depends entirely on whether a borrower chooses to refinance with their current servicer. Despite this, market participants often include recapture in their internal valuation models, creating a disconnect between GAAP accounting and economic reality. FASB is currently reviewing this to potentially standardize the inclusion of recapture in residential MSR valuations.

Endnotes

1. Jones, H. & Hale, D. (2026, March 3). Housing Supply Gap Exceeds 4 Million Homes in 2025. Retrieved from Realtor.com: https://www.realtor.com/research/us-housing-supply-gap-2026. ↩︎
2. U.S. Federal Housing. (2026, March 31). FHFA House Price Index®. Retrieved from https://www.fhfa.gov/data/hpi ↩︎
3. Freddie Mac. (2026, April 4). Primary Mortgage Market Survey® (PMMS®). Retrieved from Freddie Mac: https://www.freddiemac.com/pmms ↩︎
4. Mortgage Bankers Association. (2026, March 23). MBA Mortgage Finance Forecast. Retrieved from Mortgage Bankers Association: https://www.mba.org/forecasts-and-commentary ↩︎
5. Intercontinental Exchange, Inc. (2026). 30C-ICE Conforming 30- year Fixed Mortgage Rate Lock Weighted APR Index Futures. ↩︎
6. Intercontinental Exchange, Inc. (2026, March). Mortgage Monitor data reports. Retrieved from Mortgage Technology: https://mortgagetech.ice.com/resources/data-reports/ ↩︎