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The Best of Times

Last month, we fretted in this space about the prospects of another year of refinancing activity. It's happening, of course, and the fact that most mortgage companies are making up for servicing losses on the origination side of the business may be but small consolation for mortgage servicers.

Or is it. Most of the mortgage executives we've talked to recently are enthusiastic about the servicing side of the business. They're taking lumps on servicing now, but at the same time, they know that when rates rise, it's their servicing portfolio that will help them offset lost loan origination volume.

Just take a look at what some of the biggest players are reporting, buried in their quarterly earnings releases and not receiving the kind of attention that words like "impairment" and "amortization" are getting these days. Wells Fargo said that the average note rate on its MSR portfolio was 6.45% at the end of the first quarter, down 62 basis points. Countrywide reported an average coupon rate of 6.6%.

Sure, those numbers are "in the money" today - meaning many of those borrowers will refinance before rates edge up well above the 6% mark. But it's been many decades since huge mortgage banking firms had portfolios with such low average note rates.

The conventional wisdom - and it may be right this time - is that rates essentially have no place to go but up. Nobody knows when, or how much, but once the economy picks up a little steam, it seems unlikely that rates will continue to hover below the 6% mark. Remember, in both the 1993 and 1998 refinancing booms, it was a big deal when 30-year mortgage rates dropped below the 7% mark. And they didn't stay that low for an extended period of time, the way they have this year. What's a "normal" interest rate environment? When will this "normal" environment return?

You could make a lot of money in the bond markets if you knew the answer to those questions. But there's a widespread consensus that the rate environment we are in today is not normal. In fact, most economists believe we are at or near a trough in the rate cycle, and that over the long run, interest rates will be subject to upward pressure.

The bottom line for executives is simple. They've taken big hits on servicing lately, but they may be sitting on a gold mine.

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