Servicing Brokers: Get Ready to Start Your Engines

As I write this, the yield on the 10-year Treasury is at 4.8% and by the time you receive this issue of Mortgage Servicing News it very well could be at 5%. Mortgages, as we all know, are priced off the 10-year and as rates head north, that spells bad news for conventional lenders that have been feasting on the refi mania of the past two-plus years.

But this is a newspaper that deals with the "other" side of the mortgage business, the side that has been smacked upside the head by servicing impairment charges and faster-than-anticipated prepayment speeds.

Name a servicer, any servicer, and then look at their quarterly earnings statements of the past six to eight quarters. You will find millions of dollars worth of servicing "impairment" charges.

Does the name Cendant Mortgage ring a bell? What about Principal Residential? Countrywide Home Loans? All have seen their servicing-related earnings suffer during the refi carnage of 2001-2003. Tiring of the vicissitudes of impairment charges, Principal's parent is selling its mortgage subsidiary to Citigroup. And now that rates are heading north, north, north, it would appear Cendant Corp. could make a nice little killing by selling CM's $138 billion portfolio. Right?

Yes, conventional mortgage rates are rising like the morning tide and servicing values soon will begin firming up like granite. Right? Yes, it certainly looks that way, which means firms that buy, sell, trade and evaluate servicing rights for a living should be dancing in their Dilbert cubicles right now.

In the coming months you should begin to see bucket loads of servicing deals being offered by Cohane Rafferty, Griffin Capital, Hamilton Carter Smith, Hanover Capital, MIAC, Interactive Mortgage Advisors, Phoenix Capital, take your pick. (If I left any firms out, I apologize in advance.)

Indeed, the days of starving in the desert are long over for servicing brokerage firms. No longer will they have to rely solely on "flow" deals and portfolio evaluations to keep their doors open. Bulk servicing transactions should become plentiful. Right?

So, why do I keep on writing "right"? Well, because never before in the annals of mortgage banking has the industry had years like 2002 and 2003. During those two years residential lenders funded a mind blowing $6.691 trillion in loans - 68% of it refis, or $4.54 trillion. Consider this: there is $7.223 trillion in housing debt in the U.S., which means that 62% of outstanding home loans refinanced during those two years.

What's even stranger is that we all thought the refi party was over in the first quarter of 2003. But that's not what happened. In the spring of 2003 rates took a tumble and continued to fall through June of last year. Rates began rising in the summer and fall but then took a dip again in early 2004.

Long-suffering servicing brokers thought late last year that they'd be busy little bees in 1Q 2004, but things didn't really turn out that way. Now, with the 10-year approaching 5% and mortgage rates pumping up, it appears that all systems are go for bulk servicing deals to take off. I would like to write that yes, the recovery in servicing values is finally here, but there is a nagging feeling that the so-called U.S. economic recovery is a false positive - not because it's not happening but because it very well could be based on rates being so darn low for so long that financial conditions (and hiring) have improved for the simple reason that, well, they had to.

Paul Muolo is executive editor of both Mortgage Servicing News and National Mortgage News. He can be e-mailed at: Paul.MuoloThomsonMedia.com.

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