The value of mortgage-servicing portfolios - plagued with expectations of a surge in refinancings - is coming down as interest rates drop.

The 30-year Treasury bond yield dipped to just over 6% Monday, a little more and a little faster than anyone had expected. This has depressed the prices buyers need to pay to acquire servicing portfolios for the fees they earn on them.

But prices are not coming down as fast as some industry insiders say they should.

With the short supply of available servicing and rates upward of 8.5% earlier this year, purchasers of servicing rights could justify the high prices paid for portfolios. But with the yield on the long bond dropping close to 6% Monday, interest rates are now expected to stay in a low range, stepping up the pace of prepayments by mortgage holders.

Anthony Meli, president of the Mortgage Bankers Association of New Jersey, said the imminent change in accounting standards for servicing rights and the current rally are bringing rationality back into the market. He was quick to say that while pricing is not irrational right now, he thinks that in the near future it will be more in line with what it should be.

FAS 122 "will add discipline to the marketplace in terms of servicing values," said Mr. Meli, who is also an executive of Chemical Residential Mortgage Corp. Under the new accounting standard, servicing rights - both purchased and originated - will be marked to market value periodically.

"If they have overpaid, with interest rates declining, they could be called on to write down those same values they just booked," Mr. Meli said.

David Lereah, chief economist at the Mortgage Bankers Association of America, said he suspects that valuations on servicing portfolios have gone down in the last few weeks, relative to the value placed on servicing just a few months ago.

"Over the last couple of months rates have gone down more than people expected," Mr. Lereah said. But, he added, a good servicing portfolio manager will have sufficient hedges to protect the servicing asset, as long as rates don't come down too quickly.

A servicing risk management consultant said falling interest rates are making some potential buyers of servicing cautious.

"Pricing has fallen off significantly because of declining interest rates," said Paul Van Valkenburg, principal at MIAC Risk Management Services. "But those confident with hedging are able to get good prices on servicing, including the cost of a hedge."

Mr. Van Valkenburg said there was a similar environment in June, the last time interest rates dipped. Many bidders dropped out because they were unsure of prepayment speeds, leaving the servicers with hedges to buy servicing at attractive prices. He said he suspects the same scenario will occur now that interest rates are dropping again.

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