While rising interest rates are helping to shore up servicing values, a flat yield curve is challenging lenders as they try to manage the interest rate risk inherent in the asset. And that is just one of the things that servicing managers have to keep tabs on these days.
Operationally, servicers are as concerned with portfolio management as ever. While rates have risen and refinancing rates have tapered off, portfolio runoff remains a concern - especially with loan originators aggressively marketing "cash out" refinancing opportunities. To consolidate debt or free up cash for other purposes, an increasing number of homeowners are refinancing without a pure rate incentive.
To top it off, increasing issuance of adjustable-rate mortgages, including option-payment ARMs and interest-only loans, also may drive up refinancing. Many homeowners may switch into fixed-rate products as their loans adjust upward, especially if the yield curve remains as flat as it has been in recent months.
And interest-rate management is not the only issue on the books. The increasing popularity of new loan products may make credit performance more difficult to anticipate as well. So far, lenders report that option-payment and interest-only loans are performing well. But that's with a strong economy and relatively light seasoning on these loans. What happens if the economy slows down? What happens if rates rise precipitously? Servicing managers need to make sure they have the systems and procedures in place to manage a rise in delinquencies and defaults if these scenarios should come to pass.
So far, 2006 is shaping up to be a good year for most mortgage servicers. But prudent ones know that portfolio management is just as much a challenge in good times as in bad.
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