Your Turn to Shine

For the past three years, mortgage companies have been reporting record earnings - on the strength of loan origination revenue. During that time, mortgage servicing rights have steadily and dramatically declined in value as falling rates and refinancing activity ramped up impairment and amortization charges.

But now the tide may be changing. The Mortgage Bankers Association of America predicts that loan origination volume will fall 43% next year and another 25% the year after. The reason, of course, is the expectation that a strengthening economy will put gradual upward pressure on interest rates. And in recent weeks, mortgage rates have indeed edged upward from their historic lows. Does this represent a turning of the tide? Has a trough in rates been passed? It's starting to look like that may be the case.

While loan originators will have to scramble to keep up with a shrinking pie of new business, loan servicers should be stepping into the limelight once again in quarterly earnings reports. If the predictions hold true, MSR values will rise, and some companies, including Countrywide Financial Corp. and Washington Mutual, may be poised to post some big gains on their MSR portfolios in a rising rate environment.

Since the average 30-year mortgage rate hit a trough of 5.20% in June, the average has risen by more than 40 basis points (DOUBLE). Of course, rates remain low by historical standards and much of the outstanding balance of mortgage loans is still "cuspy," meaning the refinancing storm probably hasn't moved completely off the coast yet. Many mortgage companies reported having a record level of loan applications in their pipelines at the end of the second quarter, so the third quarter will likely once again be characterized by heavy loan origination numbers and a high level of refinancing. But clearly, the pressure is starting to ease, and it could ease even more quickly if rates rise above the 6% level, where they have not been since last year.

A slow, modest rise in interest rates - such as we have seen over the last couple of months - could be very good for servicers. Portfolio churning will slow down. MSR values will rise. And when it comes time to report to management, servicing executives are going to start enjoying some limelight again.

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