Was Hedging a Bright Spot in '07?

Not surprisingly, most of the data from the annual cost study and other analyses by the Mortgage Bankers Association paint a pretty bleak picture of the state of the industry. By 2007, declining loan production volume and emerging industry turmoil left lenders unable to cut costs fast enough to offset falling volume and lower secondary market income.

But servicing, ironically, fared OK, even showing a modest gain in profitability per loan. Marina Walsh, the MBA's associate vice president of research and economics, said that the improved servicing picture probably reflects a slowdown in portfolio churning. Servicers in the study also reported lower hedging losses last year.

Servicers, on average, earned a profit of $109 per loan in 2007, up from $58 in 2006 (see related story, page 1).

"That was one bit of good news, but they are all struggling to manage the volatility of the MSR asset," Ms. Walsh said.

This year, the industry's largest players not only scored best on measures of direct servicing costs, they also outplayed smaller players when it comes to hedging their portfolios, according to the MBA cost study.

Reduced losses related to amortization and valuation of MSRs net of hedging allowed large servicers to report better financial performance as well as better operational results from servicing activities, according to the MBA report.

In a possibly ominous sign, servicers have reported steadily rising "interest expense" during the three years up to and including 2007.