A wave of servicing portfolios has hit the market recently, but prices are holding up well-at least so far.
"Increased supply has not been reducing prices because the demand still exceeds the supply. It's still a great market for sellers," said Thomas Healy, director of mortgage banking strategies for CoreStates Capital Markets, Fort Lauderdale, Fla.
Larger mortgage servicers can afford to pay higher prices for servicing, brokers said, because they're able to service the loans for less than most smaller, independent mortgage companies.
But supply should increase even more in the coming weeks as the end of the second quarter approaches. More companies seem to be rushing to sell servicing in order to boost income, said Geoffrey R. Glick, executive vice president of Hamilton, Carter, Smith & Co., a Beverly Hills-based servicing broker.
While the desire to meet quarterly profit targets has traditionally been a main motive behind a company's sale of servicing, this practice has been less prevalent lately.
But new accounting rules may create an incentive for companies to try to sell portfolios.
The Financial Accounting Standards Board in the last year increased the amount of risk that mortgage servicers have to manage by owning servicing. When interest rates decrease, the value of the portfolio decreases as loans run off.
As a result of one such rule, FAS 122, servicers have to book originated and purchased loans on their balance sheets. Before this rule, only loans that were purchased needed to be booked.
This has forced many companies to choose between hedging strategies- which involve purchasing financial instruments that will rise in value when interest rates decrease-to protect the value of their servicing asset, or selling the servicing.
Since hedging is a costly endeavor, many smaller and midsize servicers have pared their portfolios in order to reduce their interest-rate risk.
But Mr. Healy said more earnings-related sales have taken place this year because origination volume is down for many lenders. Some of these lenders have been selling servicing in order to generate income to compensate for the lower level of production.
Mr. Healy said the size of the packages he has been selling has been "modest," $200 million to $500 million.
Another broker said his company has been offering larger amounts of servicing, between $1 billion and $1.5 billion, and these packages have sold for more than initially expected.
Many of the packages on the market are "more seasoned," according to Mr. Glick. That means the packages contain older loans. This fact also has led to higher prices being attached to servicing, Mr. Glick said.
Buying older loans is less risky than purchasing a newer portfolio because the older loans have longer prepayment histories. The buyer can more accurately judge the likelihood that a borrower will make early payments on the mortgage.
So how long can prices remain high? If more packages come to market, one would think that prices should decrease. But Mr. Healy, arguing that interest rates are unlikely to drop anytime soon, said he doesn't see any reason why prices will fall.
Still, given the current willingness to pay for servicing, one investment banker said companies that aren't committed to expanding would be wise to sell before servicing values inevitably fall.
"If I owned a midsize company, I'd be looking to cash out," the investment banker said.
