Mortgage servicing rights can, be either a bonanza or a ticking time bomb. Thanks to its vigorous originations, Countrywide Credit is well on its way to having the biggest portfolio in the business. But the company has taken steps to defuse that time bomb.

As of the end of March, its portfolio stood at $59.5 billion, just $4 billion less than that of the No. 1 servicer, Fleet Mortgage Group of Columbia, S.C.

Angelo R. Mozilo, Countrywide's vice chairman, is hoping to build the portfolio to $240 billion by the end of fiscal 1998. Even by conservative estimates, such a portfolio could bring about $350 million a year to the bottom line.

Attractive as a Hedge

Servicing portfolios are also attractive as hedges against rising interest rates, which hurt origination income. When rates rise, prepayments slow down, prolonging the cash flow from servicing.

The rub is that a portfolio can shrink significantly when declining rates encourage borrowers to refinance. And some mortgage companies that were enthusiastic acquirers of servicing rights in recent years have been battered by runoffs.

However small the likelihood of further rate drops may seem today, Countrywide is hardly unwary. A major mission of its co-founder and chairman, David Loeb, is to protect the value of the servicing portfolio.

Working from Home

"We buy call options in the Treasury 30-year futures market," explains. "We have long calls, which we think are sufficient for a major change in interest mtes. We don't try to hedge against every little shift. We have a defense against catastrophic numbers."

Mr Loeb, an expert on secondary markets, founded Countrywide in 1969 with Mr. Mozilo. He spends most of his worldng hours surrounded by video screens in his homes in New York and Squaw Valley, Calif.

He also manages Countrywide's "pipeline" risk - the interest-rate risk the company incurs from the period when a commitment is made to when the loan finally closes. If rates rise, the borrower will simply close the loan. If rates fall, the borrower may drop out.

"We use a straddle position in which we're protected if rates go up or down," says Mr. Loeb.

"We presently buy calls on the Fannie Mae 7% coupon. If rates go down, the calls become more valuable. If the borrower doesn't close, we have the value of the call. If rates go up, the call goes out of the money and we have the loan sale."

This type of hedging requires immediate knowledge of all commitments that have been made in Countrywide's extensive and decentralized organization every day.

"We go into the market every day to do our hedging," Mr. Loeb said. "We don't try to call the market, though we may choose the time of the day to go in."

Mr. Loeb says Countrywide avoids predicting the trend of the market, a practice that has cost other mortgage companies in the past. "We may have opinions on it," he says, "but our objective is just to protect what we already have."

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