The price of servicing on conventional mortgages has fallen as a result of the recent sharp drop in interest rates, servicing brokers said.
"It's a much tougher road right now," said Steven Tannehill, chief operating officer of Countrywide Servicing Exchange, a subsidiary of Countrywide Credit Industries Inc., Calabasas, Calif.
Though recent auctions have been successful, Mr. Tannehill said, the market is "not as deep as in the past. People have said, 'I need to hold back.'"
Chuck Klein, vice president at Charbonneau-Klein in Houston, said his firm arranged the sale last week of a $150 million package of loans with an average interest rate of 7.35%.
The package, which was sold early in the week, sold for a multiple of between 5 and 5.5 times the 25-basis-point servicing fee, or about 1.3% of the face value.
Several weeks before, he said, a $300 million package of similar loans traded at more than six times the servicing fee, or 1.5% of the portfolio.
The value of servicing is expected to slide when interest rates are low, because more loans in a portfolio run off as borrowers refinance.
Before, it was "easy to achieve" a six-times multiple on the servicing fee for packages with coupons of 7.25% to 7.5%, Mr. Klein said. Now, "you're not going to get six times if the coupon is above 7%."
Thursday afternoon, Mr. Tannehill's firm was auctioning a $100 million servicing portfolio of conventional loans with an average interest rate of 7.5%.
Normally such a portfolio would find about a dozen bidders; this time he expected only six to eight servicers would participate in the auction.
The latest round of political and economic crises in Russia and other emerging markets prompted a flight to quality among international investors, pushing U.S. Treasury yields lower.
Late Thursday the benchmark 30-year bond was trading around 5.30%, down from 5.51% two weeks earlier.
Actual mortgage rates have "not moved down in lockstep" with Treasuries, said Ed Elanjian, managing director at Cohane Rafferty Securities, an investment bank specializing in mortgage banking transactions, including servicing sales.
Because Treasury rates have fallen faster than mortgages, he said, servicers who use Treasury-related instruments have made more money from gains in the value of the hedging instruments than they have lost from devaluation of their servicing assets-which will prevent them from having to take writedowns in the third quarter.
But prepayment-speed forecasts from Wall Street dealers last week were up sharply from a month before, on anticipation that the spread between mortgages and Treasuries will narrow, Mr. Elanjian said.
If mortgage rates do come down, sparking a new wave of refinancings, or if interest rates rise, causing hedging gains to disappear, "yearend results for servicing-heavy companies may not be as pretty," he said.
