Happy Days Are Here Again for Hedge Managers.

As Charles Dickens once wrote: "It was the best of times; it was the worst of times." The first quarter may have seen a falloff in loan origination volume, but most big lenders posted solid gains from their mortgage servicing portfolios as rates edged upward.

The average 30-year mortgage rate ended the first quarter about a quarter percentage point higher than at the beginning of the quarter, which provided modest support for servicing values and facilitated the recovery of "impairment reserves" on the books of many lenders.

Countrywide Home Loans was among the lenders benefiting from servicing gains in the first quarter.

Countrywide reported a relatively modest $17 million in earnings from loan servicing during the first quarter, but that modest gain was a whopping $295 million improvement from the $278 million MSR loss suffered a year earlier.

But because of LOCOM (lower of cost or market) accounting, Countrywide's servicing earnings do not take into account a $160 million increase in the value of the company's MSR portfolio. In the future, Countrywide may not be so encumbered by its accounting practices.

Countrywide said that for the second quarter of this year, it has implemented hedge accounting for certain strata of its MSRs, "which may remove the LOCOM constraint for those strata."

And Countrywide continues to grow its servicing portfolio at a fast clip. As of March 31, the company serviced $893 billion of home loans, up $55 billion from one year earlier. The weighted average coupon on the portfolio was 5.9%, down 10 basis points from one year earlier. The capitalization rate on the MSR portfolio is 122 basis points, up from 103 basis points one year earlier.