Hedging: Hedge Expert: MSRs Perform Differently from IO Strips.(Brief Article)

Some of the best minds in the mortgage business gathered in Arlington, Va. recently to talk about mortgage servicing rights at the Executive Enterprise Institute mortgage servicing asset conference.

After a year which saw $1 trillion of mortgage refinancing activity, you can bet that mortgage hedging was a hot topic. As conference chairman Alan Lee, a partner in the mortgage banking group at PricewaterhouseCoopers put it, "The last 12 to 18 months have been incredibly dynamic for all of us who have an interest in managing this asset.

"Most players in the industry have had some form of impairment over the last 18 months," he added during the Executive Enterprise Institute's event.

As Kent Westerbeck of ABN AMRO North America explained, impairment happens when the fair value of the asset falls below the amortized cost.

In addition, price discovery regarding mortgage servicing rights has become more difficult because bulk trades have been increasingly scarce. That is creating challenges for lenders.

For instance, lenders need to find ways to weigh the costs and benefits associated with their hedging strategies. And they need to determine how well their loan production capacity serves as a hedge against portfolio runoff.

Ian McDonald, a Goldman Sachs vice president, said Wall Street specialists in interest and principal only strips are paying increasing attention to the mortgage servicing industry. Goldman Sachs has discovered that the mortgage servicers are "an extremely important part of the derivative community generally."