When it comes time for lenders to appraise their mortgage-servicing asset each quarter, a lot of servicing executives face a nervous prospect.

In today's environment, just about all of the assets that affect a mortgage servicing operation face uncertain prospects. Mortgage rates were lower at the end of 2007 than they had been in some time, putting pressure on the value of mortgage servicing rights. Fortunately for lenders, many benefited from hedging "out-performance," as the financial instruments used to hedge that asset gained more value than the servicing rights lost. But hedging out-performance only highlighted the inexact science of trying to protect yourself from the volatility inherent in servicing values.

Portfolio runoff declined, in part because lenders across the board tightened underwriting in the wake of the subprime crisis, giving borrowers fewer refinancing options. But while that helped reduce portfolio churning, it also reflected a difficult housing market. As lenders know, one of their biggest worries today is about the value of the collateral backing their mortgage portfolios.

Assessments of housing market conditions range from pessimistic to bleak. For the first time in many decades, housing values appear to be falling across the board, and a quick turnaround is not anticipated. Even with long-term mortgage interest rates falling to near record lows, housing values have yet to show any signs of recovery. An uncertain economy, tighter lending standards and the expectation that prices may fall further has kept many potential homebuyers on the sideline. We don't hear much about "investors" swooping in to boost house prices in hot markets these days.

Today's challenges will make the industry stronger in the long run, but for those assessing the value of servicing rights and related assets, 2008 will likely remain a difficult period. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/