Rate Drop Hurts Deals

Investors in mortgage servicing rights - and the investment bankers that broker deals - were anticipating a strong first quarter in which the long ailing "bulk" market would revive.

But as Mortgage Servicing News went to press this month, interest rates had unexpectedly fallen, and all bets on a bulk "revival" were off.

When interest rates took a dive in early March after a weak U.S. jobs report, several pending bulk servicing transactions were hurt with investors either backing off entirely or lowering their bids.

Investment bankers told MSN that a $1 billion bulk offering was scrapped entirely, one business day after the yield on the 10-year Treasury fell from to 3.7% to just over 4%.

The identity of the brokerage offering the receivables - as well as the actual seller - was not revealed, but advisors that play in that market said one thing is certain: buyers once again are becoming skittish.

"Whenever you have a drop like that, the people on the buy-side become more cautious," said one New York-based investment banker. "Prepayment speeds begin to ratchet up which will hurt values."

One executive who evaluates portfolios for a living noted, "With the end of the quarter coming up I wouldn't want to be the one telling management that they have to reduce the carrying value of their portfolio."

The bulk market for servicing rights has been extremely weak the past two years because the refinancing binge has driven prepayment speeds through the roof, reducing the carrying value of mortgage servicing rights.

Many firms have been forced to take large "impairment" charges, resulting in operating losses for their servicing units.

In the third and fourth quarters, rates rose somewhat and many in the industry believed that the long anticipated end to refis had commenced. Servicing brokers anticipated a strong bulk market in March but with the yield on the 10-year dropping all that has changed. (Mortgages are priced off the 10-year.)

"Buyers are telling us that they've decided to wait," said one servicing advisor. "I don't even know if our deals will trade now."

Firms that play in the bulk market include Cohane Rafferty Securities, Griffin Capital, Hamilton Carter Smith, Interactive Mortgage Advisors, MIAC and Phoenix Capital, among others.

Even though the bulk market has been weak, the "flow" market has held up somewhat. (Bulk servicing represents existing receivables whereas flow deals entail a commitment to deliver servicing over a set period of time.)

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