Falling Rates Put $2.5 Trillion of Servicing Rights at Risk.(Brief Article)(Statistical Data Included)

In mid-January, the average contract rate on 30-year mortgage loans dipped well below the psychologically and economically important 7% level, spurring a huge increase in refinancing.

And the two big questions on the minds of lenders were: How low will rates go? How long will they stay there? In the week of January 12, the average contract rate on 30-year fixed-rate loans was 6.89%, the lowest in 19 months. At that rate, borrowers accounting for perhaps $2.5 trillion of outstanding mortgage loans have an incentive to refinance.

That's great news for loan originators, of course, but it will test the portfolio retention strategies of many servicing managers. Falling rates have lenders worried about portfolio runoff, churning, and hedge effectiveness.

Freddie Mac is now predicting that the 30-year average will remain below 7% throughout this year, chief economist Robert Van Order said in January. Moreover, he noted that people who were betting their own money seemed to think interest rates will go down further.

Many interest rate observers predict the Federal Reserve Board again will act to reduce short-term interest rates later this month. And some expect the Fed to take at least one more strong rate move to boost economic activity later in the year.

In mid-January, Mr. Van Order said he believed "a little more than half" of outstanding mortgage loans had coupon rates that made them candidates for refinancing at current interest rates. He said the average coupon rate on outstanding 30-year fixed-rate loans was about 7.6%, or about 70 basis points higher than the average for the week of Jan 12.

And those aren't the only loans that could refinance, he pointed out. Many adjustable rate mortgage borrowers may want to switch to a low fixed-rate loan.