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38 CUSTOMER RETENTION BECOMING TOUGHER FOR SERVICERS Servicer retention hit a record low in Q1 2019 as customer retention became increasingly difficult, according to the latest Black Knight Mortgage Monitor report. Black Knight noted that around 18% of borrowers remained with the same servicer post-refi, the first time the retention rate has dropped below 20% since at least 2005. Black Knight states that customer retention has become increasingly difficult as a volatile refinance market and greater rate sensitivity shrink the number of remaining refinance candidates, further heightening competition. According to Black Knight's Data & Analytics Division President Ben Graboske, low retention rates have created some challenges. "In Q1 2019, fewer than one in five homeowners remained with their prior mortgage servicer after refinancing their first lien," Graboske said. "at is the lowest retention rate we've seen since Black Knight began tracking the metric in 2005. Anyone in this industry can tell you that customer retention is key—not only to success but to survival." Graboske noted that, with the slight increase in the 30-year fixed rate, around a million homeowners lost the incentive to refinance. "is is critical because refinances driven by a homeowner seeking to reduce their rate or term have always been servicers' 'bread and butter' when it comes to customer retention," Graboske added. "Offering lower rates to qualified existing customers is a good, and relatively simple, way to retain their business. Unfortunately, the market has shifted dramatically away from such rate/ term refinances." Black Knight's data also noted a continued decline in delinquencies and foreclosures revealing that the delinquency rate declined by 5.3%, while foreclosure starts fell by 1.5%. According to Black Knight, March's 39,700 foreclosure starts represented the lowest single- month total in more than 18 years, down 24% year-over-year. REFINANCING CONCERNS RETURN According to the Bloomberg Barclays U.S. MBS index, MBS Index duration, or the measure of a security's price sensitivity to a change in interest rates, now sits at 4.15 years, down from a recent high of 4.47 in April. According to Bloomberg, the duration drop indicates returning refinancing concerns, as homeowners are expected to increasingly refinance into lower mortgage rates and pay off their previous loans. e Index also notes that prepayment speed has shown increases of more than 20% in the last two monthly reports. However, a renewed rally that has seen the U.S. 10-year yield drop to its lowest level since March 29, and the Freddie Mac 30-year mortgage rate fall for the first time in five weeks, may continue to spark refinancings if sustained. JPMorgan MBS analysts forecasts predict a 15% increase in prepayment speeds for May. Meanwhile, Freddie Mac is pushing MBS through its move to Uniform Mortgage Backed Security (UMBS). e joint Fannie Mae-Freddie Mac security, Uniform MBS, was rolled out in June and, according to analyst teams at Morgan Stanley and JPMorgan, it is likely to cause a rise in volatility. In an article published by Bloomberg, Morgan Stanley and JPMorgan analysts discussed their recommendations on the agency MBS sector following the recent widening of mortgage spreads. In the article, Morgan Stanley advised investors to "go long" in the sector, citing a wider 30-year Fannie Mae current coupon Treasury option-adjusted spread as a positive. "e Fannie Mae current coupon spread over a blend of Treasury 5- and 10-year notes, a popular valuation method for mortgage investors, has widened 12 basis points to 85 since March 26, when it closed at its tightest level since January 31, 2018, according to data compiled by Bloomberg," writes Christopher Maloney, reporter for Bloomberg. "Its average level last year was 82 basis points."

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