MSR Values Heading Up.

After two years of steadily falling values for mortgage servicing rights, the recent rise in interest rates seems to be shoring up prices and setting the stage for a comeback in the MSR market.

With the average 30-year mortgage rate exceeding 6.25% in early August, the majority of outstanding loans are no longer "in the money," meaning consumers have a financial incentive to refinance.

By contrast, when rates hit a low in June, Fannie Mae estimated that over 90% of its portfolio was in the money.

Mortgage Industry Advisory Co. here, which has created a model to track servicing values, found that overall MSR values increased by over 50% in July as the result of rising interest rates, which reduced the risk of runoff due to prepayment. And the value of agency 30-year loans increased 125% in July, according to the MIAC index. After a dismal second half of 2002 and first half of 2003, servicing values - measured as a multiple of the servicing fee - are almost back to their levels of one year ago, MIAC said in its monthly report on the MSR market.

But there is still the question about when an active market for bulk servicing trades will take hold again.

Greg Bennett, president of Hamilton, Carter, Smith & Co., Beverly Hills, Calif., said in the near term, the rise in rates will have little impact on the servicing market. He noted that runoff has been "cataclysmic" for many servicers over the past year.

"No one is willing to make that risky bet that we've seen the bottom of rates," he said. "But if this change in interest rates is sustainable in the long term, then certainly the economic value of servicing would increase."