Mortgage Scene: Don't Fret, Servicing Values Will Return - Some Day.(Brief Article)(Statistical Data Included)

In a second-quarter conference call, the publicly-traded Countrywide Credit Industries noted that since the refi boom started last year, it has written down the value of its residential servicing rights by $4.4 billion. In the second quarter alone, refis reduced the firm's net profit by at least $168 million.

On its surface, the $4.4 billion number seems huge, but despite the writedown and the hit it took on servicing, Countrywide posted record earnings of $191 million for the quarter. How could this be? Simple actually. Countrywide knows how to hedge and the writedown was mostly a non-cash accounting adjustment.

But more importantly, Countrywide (like many lenders) is making so much money on the front end (originations) that whatever it's losing out the back door (servicing) is chump change. Then again, Countrywide is a powerhouse among lenders and relishes a good refi boom. Firms that were dependent on servicing for their fortunes (the now defunct HomeSide for instance) haven't faired as well.

If you talk to servicing brokers (those folks that buy and sell housing receivables for a living), you know that the conventional "bulk" market is in the tank, except for niche products. After all, how can you sell servicing rights when the underlying asset is refinancing at warp speeds.

Yes, interest rates are at four-decade lows. My father had a 3% VA loan back in the 1950s. If rates keep heading south, could the industry see a 4% FRM? Some lenders are already offering FRMs at 5.5%, that is, as long as the consumer will part with three points up front.

According to the Mortgage Bankers Association, when it comes to servicing, amortization and impairment costs averaged $578 per loan in 2001, a 130% increase from the ...