2005 Could Spell Relief for Servicers.

Most economists expect mortgage rates to rise gradually over the balance of this year as a strengthening economy encourages the Federal Reserve Board to raise rates.

Rising rates should be good news for mortgage servicing managers, even if higher rates slow down loan origination volume. That's because higher rates will bolster the value of mortgage servicing rights and make servicing a more profitable business. Lower portfolio churning should accompany a decline in refinancing activity.

And most economists expect to see only a modest rise in interest rates this year, with the 30-year mortgage rate average somewhere between 6.0% and 6.5% by the end of 2005. While that's higher than the 5.8% average for 2003 and 2004, it's not enough to seriously dampen home sales activity, most industry experts believe.

So that makes 2005 look like a good year for the mortgage industry. Mortgage servicing rights should regain value nicely, even if loan production profits fall from the record levels seen in the last two years.

But there are a number of "what if" scenarios that cloud the forecast, as there always are when talking about the future direction of interest rates.

On the down side, a number of events could lead to a spike in interest rates. While that may not rattle servicing managers and MSR hedge advisors too much, it could be devastating to loan origination business.

Namely, huge U.S. government budget deficits and trade deficits have left the ...