Bernanke's Vigilance Could Boomerang

Today, the value of mortgage servicing rights is rising as interest rates edge up and portfolio churning slows down. But if there is one lesson to be learned from recent real estate lending cycles, it's don't count the refinancing business out.

Finally, the refinancing mania of recent years appears to have ebbed. While mortgage rates remain at levels that would leave homeowners drooling in the 1980s, at 6.67% at the start of June, actually seemed high to most homeowners who obtained conventional home financing in recent years. In fact, the average 30-year, conforming mortgage rate was the highest it had been in four years in early June, according to Freddie Mac. And at 6.67%, the average 30-year, FRM was 105 basis points higher than it had been one year earlier.

Inflation jitters - and concern that a hawkish Fed will raise rates and restrain growth in order to keep inflation at bay - got the blame for putting upward pressure on rates.

"The Fed released the minutes of its most recent FOMC meeting, which showed that some members were concerned about inflationary pressure. This caused the bond market yields to rise, and brought about market speculation that the Fed may hike rates sooner than had been expected," said Frank Nothaft, Freddie Mac vice president and chief economist. "All this combined to nudge rates up again this week."

While Fredde Mac expects rates to keep rising, Mr. Nothaft said the increase is likely to be steady and gradual. That forecast is echoed by other economists who focus on the real estate finance industry.

Data from the Mortgage Bankers Association also show a stabilizing market. Refinancing dipped to 34.9% of new home loan applications in late May. At the peak of the refi boom, refinancing was as high as 75%.

But before you set aside your hedging strategy, consider this. Even as rates rise, some economists are seeing signs of a slowdown in growth.

Orawin Velz, writing in a weekly commentary for the MBA, said economic reports in the first week of June confirm a broad slowing, citing payroll gains of just 75,000 jobs in May and downward revisions of April and March payroll data as evidence.

"Other reports are consistent with economic growth decelerating from the fast pace of the first quarter," she said.

So what does that mean? If past is prologue, rates could reverse course and drop again.

Already, we've seen an inverted yield curve rear its head at times. Clearly, demand for long-term credit is not so great as to push 30-year mortgage rates up too high in the absence of a major inflation threat. And if Federal Reserve chairman Ben Bernanke's hawkish comments about inflation do portend more rate increases, the Fed might even push rates up high enough to slow the economy or even create a recession. That could dampen demand for long-term credit and send rates falling again. And if that happens, we all know which way MSR values will go. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com