CFO Focus: Why it’s worth considering mortgage servicing rights hedging
Credit unions can lock in some value and protect themselves against a falling-rate environment.
Many institutions have experienced significant increases in the value of their mortgage servicing rights assets this past year, making MSR hedging a timely topic.
MSR assets generally increase in value when rates increase due to slower prepayment speeds leading to higher projected servicing income. In fact, the coupon rates for many servicing books are so low that models don’t project any further decreases in prepayment speeds given a rise in rates! It seems likely that many MSR assets may have reached their terminal values with refinance activity grinding to a halt.
Simply put, there seems nowhere to go but down from here for MSR asset values. The good news is that depositories can lock in some of that value and protect themselves against a future falling-rate environment through MSR hedging. While no one knows when the current trend of rising rates will end, we do know that it won’t go on forever. Now is the time to consider your options and potentially create more stability around notoriously volatile MSR asset values.
Understanding Mortgage Servicing Rights assets
When mortgage loans are sold, two cash flow streams are created: the loan principal and interest payments and the servicing fee payments. MSR refers to the right to service mortgage loans for a fee. The resulting asset value is a function of the projected future servicing fee payments.
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