Mortgage Servicing Values Plummet To Historic Lows.

With mortgage rates hitting a four-decade low in October, the market for mortgage servicing rights continued to tailspin downward, according to an index created by the Mortgage Industry Advisory Corp.

Moreover, some industry experts believe that even when rates stabilize or start to increase, the MSR market may find it difficult to reach the kind of peaks achieved just a couple of years ago, when servicing rights sometimes traded for a multiple of over seven times the servicing fee.

Herman Churchwell of the investment banking firm Hamilton Carter Smith, Beverly Hills, Calif., said the market for MSR's is "illiquid" at the moment, but that condition comes and goes over time.

He is more concerned about long-term trends, such as industry consolidation, that might make it more difficult to trade MSR portfolios.

In addition to prepayment worries, other factors are dampening the market today. For one, the huge writedowns reported by HomeSide and other lenders have potential buyers feeling jittery.

Those jitters may be exacerbated by third-quarter MSR writedowns and impairment charges. In a recent research note, Sandler O'Neill managing director Mike McMahon said that just about every company with capitalized mortgage servicing rights on their balance sheet is vulnerable. Lenders that lack financial hedges and do not have a strong loan origination capacity are the most vulnerable to these writedowns,

Mr. McMahon said.