Another MSR Hit?

As Yogi Berra once said, "It feels like déjà vu all over again."According to the script, 2004 was supposed to be the year that interest rates started to gradually rise. Servicing values would stabilize and even start to increase. A market for trading of bulk portfolios of mortgage servicing rights seemed poised to resurface.

That was then. Now that the books are closed on the first quarter of the year, the industry is once again bracing itself for a wave of impairment charges against MSR values. Falling interest rates have rekindled refinancing activity. Loans are running off the book as quickly as last summer. That portfolio churning, and the expectation that borrowers who took out new loans just a few months ago may be on the cusp of refinancing, has driven down MSR values.

Moreover, as analysts at Sandler O'Neill recently pointed out, the timing of the recent rate dip, which seems to have reached its nadir in late March, was not good for mortgage servicers that rely on loan production gains to offset servicing writedowns. In many cases, they will have to report impairment to their portfolios for the first quarter, but gains from a surge of lending activity in March won't be booked until this month or next, not in time to offset the first-quarter writedowns.

And servicing values have been falling, according to data from Mortgage Industry Analytics Co., or MIAC. Its computation of generic servicing values showed a steady decline as rates fell in March.

So what's a servicing manager to do? Hedge, of course. But hedging can be an expensive and imprecise science. So another task is making sure that everyone in the company understands that mortgage banking is a cyclical business.

Having been stuck in high gear - great for originators, horrifying for servicers - for the past three years, it's easy to forget that this is a business with huge harvests and fallow seasons. But when rates do rise, lenders and their parent companies will once again remember what it is they like about the servicing end of the business. We've been saying it for quite a while, but everyone knows that someday mortgage companies will need to look to the servicing side of their balance sheet to keep senior executives and investors happy.

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