There was an article in a trade periodical this week that asserted that the mortgage market is rebounding as rates drop. While that may be good for mortgage originators, the benefit is far outweighed by the negative impact on the servicing side of the business.

Servicing valuation is driven by a host of factors. These include: costs, earnings on escrows, delinquencies, discount rates, and a plethora of others. However, the primary value driver is prepayment speeds, and prepayment speeds are driven by market rates. Accordingly, you would expect that there would be a positive relationship between servicing values and market rates …there is!

We have been tracking servicing values of the larger servicers for 15 years. The blue line shows the average of their value as reported in their 10Qs. These firms account for approximately $3 trillion of servicing. The red line is the CF30 (conventional fixed rate 30) market rate as reported by FHLMC. While it is visually apparent that a correlation between the two exists, the correlation is, in fact, a very strong 0.88. 

Assuming this 15-year correlation holds true for another quarter, a drop of (say) 50 bps in mortgage rates would result in a loss of 9 bps in servicing value. The one-time gain-on-sale from the new originations, is dwarfed by the $5.4B loss in value of the nation’s servicing for others portfolio.

Curious about how rate fluctuations impact your servicing portfolio? Let’s dive into the data together. Contact us today for expert insights and strategies to help you stay ahead in a changing market.