MSR Prices Remain Low.(Industry Overview)

While the pace of refinancing has tapered off, the value of mortgage servicing portfolios has yet to show a sharp recovery.

A number of factors are suppressing the value of bulk-servicing portfolios that come to market, some of them short term in nature and some of them long term.

Jeff Levine of Baview Financial Trading Group, Miami, said that mortgage lending is not only a cyclical business, it is also a changing one. We are now in an environment where most servicers are actively hedging, he said.

To protect their downside from impairment when rates fall, servicers have hedged away much of their upside when rates rise and prepayments slow down.

When rates rise, the value of servicing rights on an existing portfolio increases. But if a lender's gain on servicing values is offset by hedging losses, they may not be able to sell servicing rights for a gain and offset lost loan production income as they often have in the past. Add to the mix, the hedge accounting rules of FAS133, and accounting-driven sales become more complex.

"We're a little bit in uncharted territory from that perspective," Mr. Levine said.

Consolidation is also having an impact on the game. Some of the most active bidders on servicing have been acquired or merged with other firms.