MSR Values Stabilize

The value of mortgage servicing rights was fairly flat in the fourth quarter of last year, but as rates edged up in the early weeks of 2007, the servicing industry looked poised for strong financial gains in the first quarter.

And as portfolios got bigger, the biggest MSR assets became more valuable than ever before.

Wells Fargo, the nation's largest mortgage servicing value, reported that changes in the value of its MSR asset net of hedging results were "negligible" in the fourth quarter. (See related story, page 3). In fact, Wells Fargo reported MSR values that were relatively flat for last year as a whole.

The company listed a fair value for its MSR asset (for a $1.37 trillion home loan portfolio, of which $1.28 trillion were loans serviced for others) of $17.6 billion as of Dec. 31, 2006. At year-end 2005, Wells said the single-family MSR was worth $13.8 billion a year earlier.

The company's weighted average note rate was 5.92%. And the MSR asset for loans serviced for others was valued at 1.42% of the portfolio.

Washington Mutual, the nation's third largest servicer, valued its MSR asset at $6.2 billion at the end of last year. That was down sharply from a year earlier, reflecting a smaller balance of loans serviced for third parties. WaMu sold much of its MSRs on government loans and on home loans from outside of its banking footprint to Wells Fargo last summer. The company serviced $445 billion of loans for others at the end of last year as part of its total $795 billion of home loans being serviced.

The company valued its MSR asset on loans serviced for others at a ratio of 1.39% of the balance as of Dec. 31, 2006, four basis points lower than the valuation ratio used at the end of 2005.

Countrywide Home Loans said its servicing business contributed $660 million to pretax earnings last year, but just $9 million of that total came in the fourth quarter, as servicing values fell net of hedge losses and interest expense related to servicing rose. Like Wells Fargo, however, Countrywide said its servicing fee revenue net of guarantee fees totaled more than $1 billion in the fourth quarter.

"The primary sources of the negative valuation movement were the increased investor yield requirements (wider option adjusted spreads) and the impact of higher delinquencies on residual valuations," Countrywide said in its earnings announcement.

Countrywide said that on average, the company serviced $1.261 trillion of home loans during the fourth quarter.

Industrywide, it looks like the first quarter may shape up as a strong one for mortgage servicing executives.

George Christo, senior vice president at the Prestwick Mortgage Group, Alexandria, Va., said servicers last year were helped by a rise in rates during the week after Christmas. Only a week before the end of the year, the 10-year Treasury rate was low enough that it may have caused some "hand wringing" about year-end servicing values, he said.

Since then, mortgage rates have continued to edge up, and the general trajectory of the 10-year Treasury has also been upward. Mr. Christo said that has helped out servicing values a fair amount. Should the 10-year Treasury rate hit 5% - a level it was flirting with in mid-February - that would help even more, he said.

"The activity that we have seen in the marketplace has been very good in terms of bidding interest," he said. "Cracking that 5% is where the servicing market will start going from decent to being really good from a seller's perspective and from a valuation perspective." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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