Mortgage rates are at their lowest level since early 1996, leading some to speculate that another refinancing boom is on the horizon.

A wave of refinancings would boost origination volume. Many lenders saw declines in first-half volume compared to last year. But despite the potential pickup in volume, some say lower rates could create problems for companies with large servicing portfolios.

"Are they properly hedged for a refi-boom-type atmosphere?" said David Lereah, chief economist for the Mortgage Bankers Association of America. "The jury is still out. We won't know until it happens."

When interest rates drop, runoff in the servicing portfolio increases. Lenders must find new loans to replace those that have been refinanced, or the value of their portfolios will decrease. Servicers hedge their portfolios against this rate risk by buying derivatives that are pegged to rise in value when interest rates fall.

But several large and midsize servicers could face writedowns on their servicing assets because they have not added hedges as fast as their portfolios have grown, said Robert N. Husted, principal of MIAC Risk Management Services.

A precipitous drop in rates is not expected. But mortgage rates have already fallen about 90 basis points since April, so they won't have to fall much further to stimulate a refinancing boom, observers said.

Mr. Lereah said 35% to 40% of mortgage applications are for refinancings currently, compared to about 15% to 20% normally. He added that a large wave of refinancings could occur if the 30-year fixed mortgage rate were to fall below 7%. Freddie Mac's latest weekly survey reported this rate at 7.31%.

Thomas Jacob, chief executive officer of Chase Manhattan Mortgage, said new accounting rules make declines in interest rates more dangerous for servicers because all servicing must be accounted for on a company's balance sheet. This was not the case in 1993, during the last significant wave of refinancing activity.

"If you're not properly hedged, it's a great risk," Mr. Jacob said. Chase's $160 billion servicing portfolio is the nation's third-largest. Mr. Jacob said Chase uses hedges designed to protect the portfolio at interest rates 300 basis points higher or lower than they are today.

Mr. Husted said the key to watch is the 10-year Treasury rate. As of midday Friday, it stood at 5.97%, its lowest level since January 1996. If the 10-year Treasury stays this low for more than a month, he said, refinancing activity could pick up.

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