What happens to the market for mortgage servicing rights when interest rates spike upward, as they have recently?

Not too long ago, the answer would have been that it becomes a seller's market because higher rates will halt refinancings and loans will stay on the books longer. This extends the cash flow from servicing fees and driving values up.

But this time around, industry experts say, prepayment speeds aren't as crucial because buyers and sellers are increasingly looking at factors that are more strategic. The experts agree that companies looking to buy are usually long-term players, taking a broader view than just the level of interest rates.

The strategy at North American Mortgage Co., Santa Rosa, Calif., for example, is to sell servicing rights almost immediately after originating loans to realize the servicing value and avoid hedging costs and possible volatility under new accounting rules. Conversely, Countrywide Home Loans, Pasadena, Calif., has steadily increased its portfolio to more than $130 billion and remains the nation's largest servicer.

Most companies purchase servicing rights to diversify both the product mix and geographic distribution of a portfolio. Because of the economic downturn in California in the last few years, servicers have been getting away from California loans, said Bill Spinnard, managing director at Furash & Co., Washington.

Tom Healy, director of the mortgage strategies group at Meridian Capital, Fort Lauderdale, Fla., said the price of servicing has risen because for the last year there have been more buyers than sellers. He attributes the imbalance to a recent accounting-rule change.

"The sellers prior to FAS 122 that only sold servicing to book the income are not there anymore," Mr. Healy said. He was referring to a Financial Accounting Standards Board rule requiring lenders to recognize both originated and purchased servicing rights on their balance sheets.

An analyst said that most companies are either in the servicing business for the long term or out of the business. But there are exceptions.

"There are a few companies that play the market, buying low and selling high, like Roosevelt (Financial Group)," said L. Todd Vencil at SNL Securities, Charlottesville, Va. He said the St. Louis thrift took advantage of the servicing price environment. But that is rare.

"For the most part, companies are making strategic decisions whether or not to stay in this business. The ones getting out aren't going to get out at low prices, but they are going to get out eventually. They are pricing for the short term but making long-term decisions," Mr. Vencil said.

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