Low Rates Raise Specter of MSR Impairment.(Hedging)

Byline: Ted Cornwell

As if mortgage servicers don't have enough to worry about heading into 2009, record low interest rates threaten to spur a new round of portfolio churning and servicing impairment.

At least, that's the risk lenders were facing as the industry began to tally fourth quarter and full year 2008 results. Credit woes aside, servicing rights all of a sudden no longer looked like such a great natural hedge to offset lower loan origination volume, given the peculiar factors placing stress on the economy. As MSN went to press, one small bank (Community Trust Bancorp of Pikesville, Ky.) warned investors to expect to see a decline in the market value of its MSR asset. The bank said its MSR write down will total about $1.1 million.

In the waning weeks of last year and in early January, the weekly home loan application survey of the Mortgage Bankers Association showed that refinancing activity was accounting for about 80% of home loan applications. That's even higher than the refi share during the peak months of the 2003 refinancing boom, perhaps the biggest wave of refinancing on record.

To be sure, one reason that the refi share was so high is that home purchase lending remained stubbornly low, reflecting lower home values and tightened underwriting guidelines that have made it difficult for many potential home buyers to take advantage of today's historically low interest rates. In the first week of January, the average 30-year mortgage rate averaged just 5.01%, the lowest ever recorded in the survey's nearly 40-year history of Freddie Mac's survey. That's about 20 basis points lower than at the low point of the refi boom, and it marked the tenth consecutive week of falling rates in the Freddie Mac survey. It was also the fourth week in a row that a new record low was established.

And get this ...