MSR Disclosure Boosts Countrywide's Stock Price.(mortgage servicing rights and Countrywide Financial Corp.)

You wouldn't expect to see a company declare that its mortgage servicing rights lost $1 billion in value to impairment and amortization - a fact quickly highlighted by journalists like myself - and then watch its stock price soar on the day it releases its quarterly earnings report.

But then again, not many companies are as agile at managing interest rate hits to its MSR portfolio as Countrywide Financial Corp. And while my outlook may be provincial - journalists love companies that disclose a lot of information - investors seem appreciative as well in Countrywide's case. The stock jumped to a 52-week high of $68.30 on the day the firm announced its earnings.

Not every mortgage company is as generous as Countrywide is with the amount of information about its MSR portfolio that it releases publicly. Then again, Countrywide can afford to be generous.

Why? Simply because the good news far outweighed its servicing hits. The company lost over $500 million from servicing, with servicing income and a bit of hedging trimming the impairment and amortization costs. But Countrywide also earned nearly $900 million from loan production activities. Its mortgage banking segment reported an impressive $354 of pretax earnings in the first quarter, a record for the firm.

But impressively, Countrywide once again relied upon its "macro hedge" to report record earnings for the eighth consecutive quarter. The natural hedge of loan production has proven to be a tricky tool for many mega-servicers. Typical replenishment ratios often aren't high enough to offset losses to the servicing portfolio when borrowers refinance in droves - unless your company is very good at the loan origination game. And Countrywide is. Just consider it produced $102 billion of home loans in the first quarter. A busy pipeline at the end of the quarter suggests that Countrywide will once again report strong origination volume when second-quarter results are released.

Another indication of Countrywide's success with its "macro hedge" is that its servicing portfolio continues to grow at a strong clip. At the end of the quarter, Countrywide serviced $502 billion (the figure was closer to $510 in late April, chairman and CEO Angelo Mozilo told investors in New York). The end-of-quarter number represents growth of 41% from the size of the company's portfolio a year earlier. And in the first three months of 2003 alone, Countrywide produced $52 billion more in loans than those that prepaid.

That's no accident. Countrywide has long stressed its commitment to growing its servicing portfolio "organically" through internal loan production rather than relying on portfolio purchases. The ...