BSI’s Larry Goldstone: Why Servicing Performance is a Capital Markets Issue

Larry Goldstone is president of Capital Markets & Lending at BSI Financial Services, Irving, Texas. He is a 30-plus-year veteran of the mortgage and financial services industries, including more than 10 years with BSI Financial. He works on all aspects of mortgage servicing, including capital markets strategies, communications, data analytics and strategic leadership. He previously led BSI’s mortgage servicing rights strategy as executive vice president of capital markets.

MBA NewsLink: Larry, how has the conversation around MSR performance changed over the past 12 to18 months? What’s driving performance today compared to prior cycles?

Larry Goldstone: Two shifts have reshaped the MSR market over the past 18 months. The most consequential is the growing role of recapture economics in driving MSR cash flows and overall returns. Recapture was always a factor, but it has emerged as one of the primary drivers influencing MSR pricing, valuation and bidding activity.

Short-term interest rates have also moved meaningfully lower, particularly those tied to the federal funds rate and the Secured Overnight Financing Rate (SOFR). Float income—interest earned on escrow and custodial balances—today represents a significant portion of MSR value. As short-term rates have declined, that income stream has been squeezed.

Despite that compression, overall MSR values have held up, largely because recapture has offset the decline in float income as components of overall MSR values. Another broad takeaway is that MSR performance is no longer driven primarily by market conditions like mortgage rates, short-term rates and yield curve shape. Servicing costs, servicing quality and asset management now play an equal, and in some cases greater, role in MSR valuation.

MBA NewsLink: Where do you see the biggest disconnect between how MSRs are valued and how they actually perform in practice?

Larry Goldstone: Prepayments remain the single biggest driver of MSR performance, and that’s where we’ve seen some of the largest disconnects between assumptions and reality.

Loans originated or acquired between 2020 and 2022 were often modeled with the expectation that mortgage rates would remain near 3%. Rates moved sharply higher instead, and prepayment speeds slowed dramatically. MSR holders benefited significantly as those loans are staying on the books far longer than originally projected.

Float income followed a similar pattern. When rates were near zero, float carried little value. As rates rose, the contribution of float to MSR income became a very meaningful contributor to MSR returns, again to the benefit of holders.

The ongoing challenge is that the interest rate environment is never predictable. Interest rates can move in either direction—there are credible arguments for both outcomes, even in today’s interest rate environment. That uncertainty makes forecasting, and ultimately valuation, more complex and more dependent on operational execution.

MBA NewsLink: How are rising delinquencies and higher servicing costs reshaping MSR economics?

Larry Goldstone: A broad-based spike in delinquencies hasn’t materialized yet, but economic uncertainty is elevated. We’re watching the employment-delinquency relationship closely. Employment is the leading indicator that matters most when it comes to mortgage delinquency.

That relationship is tighter today than it was a generation ago. Historically, borrowers treated their mortgage as the last payment obligation they would miss, even during unemployment. Government sponsored forbearance programs and shifting regulatory objectives have changed that substantially.

For MSR holders, servicing performance comes down to collections. When borrowers stop paying, cash flows fall short of projections. MSR investments are underwritten against specific delinquency assumptions, and when those assumptions prove too optimistic, the impact on returns is direct and measurable.

MBA NewsLink: In practical terms, where does servicing execution have the greatest impact on MSR performance, and what are the most common operational breakdowns that can erode value?

Larry Goldstone: Default servicing is another aspect of servicing where execution matters and where the cost gap can be the steepest. Default servicing is significantly more expensive than servicing current loans. How well a servicer manages that process directly impacts cost-to-service, advance requirements, foreclosure losses and ultimately MSR returns.

Foreclosure and loss mitigation timelines are especially consequential. In states like New York, New Jersey and Massachusetts, foreclosures can drag on for years. We’ve seen borrowers go without making mortgage payments for extended periods while the servicer continues advancing principal, interest, taxes and insurance on behalf of the borrower throughout.

Those advances can accumulate into very large balances. They are often recoverable, but the timing can create real financial pressure for servicers that don’t have the financial wherewithal to maintain advancing requirements. Controlling foreclosure timelines and servicing costs is essential to preserving MSR value.

Most operational breakdowns occur in this same area. Delays in loss mitigation, prolonged foreclosure timelines and ineffective borrower engagement often lead to greater costs and losses when resolving delinquent borrowers’ loans. Borrower contact is often the first obstacle, as delinquent borrowers frequently avoid communication, which extends timelines and increases costs.

Technology can play an important role in addressing communication with delinquent borrowers. BSI uses data analytics and predictive models to sharpen borrower contact strategies, such as determining when and how to reach specific borrowers most effectively. Even modest improvements in contact rates can meaningfully reduce timelines and lower costs, which help protect MSR returns.

MBA NewsLink: What are high-performing servicers doing differently today?

Larry Goldstone: The best servicers treat data and data analytics as core operating tools. Servicers can model borrower behavior using AI and language learning models to predict likelihood to prepay or likelihood to default. These tools can also suggest the best days or time of day to reach out to borrowers to get them to communicate, so they can understand their options for bringing a delinquent loan current. 

The best servicers are also highly disciplined in how they price MSRs, often adjusting bids state-by-state to reflect differences in servicing complexity and legal risk. Judicial foreclosure states like New York carry long, costly foreclosure timelines. Non-judicial states like Texas offer faster, more predictable resolution timelines. Those differences directly affect expected costs and returns, and top servicers price accordingly.

Leading servicers are also investing in the borrower experience: making payments easier, mortgage loan information more accessible, and servicer engagement easier. Better borrower relationships improve payment performance and create brand value and goodwill. That ncreases opportunities for servicers to successfully offer other products or services, like new loans or insurance.

MBA NewsLink: Looking ahead, what should servicers and investors be paying closer attention to when it comes to MSR strategy and performance?

Larry Goldstone: The fundamentals haven’t changed. Credit quality, borrower performance and the ability to manage and recapture or retain customer relationships remain the core drivers of MSR value.

That said, today’s macro backdrop is unusually unsettled. Interest rates, inflation, global events and government policy each introduce variables that make predicting future outcomes difficult.

The bigger shift is how the industry thinks about servicing itself. For years, servicing was seen as a cost center to be managed tightly. Today, it’s increasingly a performance driver. MSRs are no longer passive financial assets. They are operational assets, and how they are managed day-to-day directly influences returns, valuation and investor outcomes.

That recognition is reshaping how servicers and investors approach MSR strategy. The pace of that change is accelerating and will continue shaping MSR strategy going forward.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)