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Flat Yield Curve Is Challenge for MSR Managers.
New York -- The first quarter of 2006 should have been the best of times for loan servicing managers. Rising long-term interest rates finally put the lid on sky-high prepayment rates, helping to boost loan servicing values.
But that was only half the story. A flat yield curve made hedging of interest rate risk more expensive, and more difficult, for some of the industry's largest players.
Interest rate risk management on mortgage servicing rights became more expensive for companies such as Washington Mutual, which reported $151 million in risk management costs associated with its mortgage servicing rights during the quarter, up from $14 million in the fourth quarter. Last year during the first quarter, WaMu actually posted net revenue of $213 million from MSR risk management. That's a year-over-year increase of $364 million in MSR risk management costs.
Tom Casey, executive vice president and chief financial officer at Washington Mutual, explained the hedging challenges during WaMu's quarterly earnings conference call.
He said the growing cost of hedging WaMu's MSR asset offset a portion of the company's gains in loan production revenue, a problem WaMu has warned about in previous discussions about how the flat yield curve between long-term and short-term interest rates is affecting the company.
Mr. Casey attributed the MSR risk management challenge to the yield flattening. "As an illustration, over the past year, the two-year to 10-year swap spread has compressed from 81 basis points to only 8 basis points," he said.
Nonetheless, he said WaMu ...
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Source: HighBeam Research, Flat Yield Curve Is Challenge for MSR Managers.