Servicing Values Starting to Creep Up Along With Rates.

The mortgage industry has plenty of worries right now, with fallout from the subprime crisis continuing to spread and origination volume on the decline.

But fortunately for servicing executives, interest rate risk on mortgage servicing rights has moved off the front burner.

In fact, with long-term rates creeping up in recent months, servicing values have started to firm up. And we've noticed a number of bulk servicing packages being brought to market in recent weeks, a sure sign that MSR owners believe demand for existing mortgage assets is strengthening.

But as we all know from the big refinancing boom that peaked in 2003, what goes up can always come down again. Just because rates are firming up does not mean that hedging is a thing the past.

Still, most big servicers seem to be pretty well positioned to glean substantial value from their servicing portfolios. Forget about the valuations - Countrywide and Wells Fargo are already generating over a billion dollars in fees from their servicing portfolios. That cash stream comes in handy as loan origination volume tapers off. Even more impressively, from a valuation perspective, is the weighted average coupon on portfolios outstanding. Wells Fargo's WAC is below 6%.

That bodes well for the duration of the asset and suggests that the loans outstanding today may be more resistant to rate-induced refinancing than most portfolios of the past. But we've seen the 30-year rate hit too many record lows in the not too distant past to discount the possibility of another rate rally.

And refinancing has hardly gone away. In recent weeks, the MBA's weekly loan application survey has found that refinancing has still accounted for about 40% of home loan applications. Much of it is probably being driven by borrowers with adjustable-rate mortgages who are switching into fixed-rate or other loan products as ...