If You Can't Beat Them, Sell MSRs to Them: 'We can be there when they need their next financial product.'.(mortgage servicing rights )

Few companies detail their experience hedging mortgage servicing rights in as much detail as Washington Mutual. And the companies reward for this generosity of disclosure? People like me in the media and industry analysts get to dissect and criticize them to an extent not possible with many companies.

So let's take a look at WaMu's second-quarter hedging performance, as detailed in the company's earnings release. The big news, of course, was WaMu's decision to sell the servicing rights on its government-backed loans and out-of-footprint home loans to rival Wells Fargo. That move in itself reflected the difficulty and cost of hedging a multibillion-dollar mortgage servicing asset.

WaMu took a $101 million after-tax hit on the sale of $2.6 billion in mortgage servicing rights (which accounted for $140 billion of home loans), but the company's leaders say that offloading a big chunk of the MSR asset improves WaMu's risk profile.

"When the MSR sale closes at the end of July, our MSR to stockholders' equity ratio will fall from 35% at June 30 to approximately 25%," chairman and CEO Kerry Killinger told investors.

WaMu had indicated an intention to reduce the MSR asset as a ratio to equity, but few in the industry expected the transition to be made with one huge servicing sale.

Chief financial officer Tom Casey said the sale reflects WaMu's decision to focus its loan origination effort on "higher-margin, higher-yielding products." In addition, he said the sale provides a better balance between credit risk and interest rate risk for the company.

WaMu executives say that credit risk can be managed, one is tempted to say massaged, effectively with loan loss reserves. Interest rate ...