Impairment Time.(Brief Article)

During the first quarter, interest rates on 30-year mortgages fell to near record lows. The Fed made several unexpected rate cuts. Refinancing accounted for well over half of new mortgage applications. Great news for loan originators, but it sounds like a disaster for your mortgage servicing portfolio, right?

Not this time, if first-quarter financial results are any indication. Even with new accounting rules kicking in, which make it burdensome to achieve hedge accounting treatment, few lenders took big impairment charges against their servicing portfolios. Amazingly, at least in the first quarter, most big lenders reported little bad news about the value of their servicing portfolios. Runoff must have been a threat, but it appears that hedging and natural replenishment worked according to plan.

That's no reason to be complacent, however. As mentioned earlier, the new FAS 133 accounting rules are making it imperative for lenders not only to hedge their servicing portfolios, but to do so with an eye toward the accounting implications of their hedging strategy. Failure to do it right will increase earnings volatility, not something that senior management likes to see at publicly traded firms (and we don't need to remind you that most mortgage companies are subsidiaries of publicly traded banks and thrifts).

Of course, no refi boom goes by without some firms facing bad news. Fleet is getting out of the mortgage business by selling its home loan ...