First-quarter earnings for 2016 were marred by negative adjustments to the “fair value” of each company’s mortgage servicing rights portfolio. Looking at the current status of the market, the industry might go through the whole situation again due to the impact of Brexit, a report from Fitch Ratings said.
According to Michael Laidlaw, Johann Juan and Roelof Slump with Fitch Ratings, “The likely drop in U.S. mortgage rates following Brexit will hurt valuations for some U.S. residential mortgage servicers. This comes on the heels of previous mortgage servicer right (MSR) valuation declines that already took place in the first quarter of this year.”
Late last week, the U.K.’s decision to leave the European Union completely shook the market, with one of the side effects likely being mortgage rates dropping even further below the current low interest rates.
“We expect mortgage rates to reach historic lows in the wake of the Brexit vote, as investors flock to relatively safer investments in U.S. mortgage-backed securities,” said Erin Lantz, Zillow vice president of mortgages, when the news first came out.
Revisiting the negative circumstances of last quarter, the first quarter’s historically low interest rates pulled down the performance of Nationstar Mortgage, Walter Investment andPHH Corporation, to name a few, as a result of the impact of negative adjustments to the “fair value” of each company’s mortgage servicing rights portfolio.
Fitch Ratings predicts that this could happen again but possibly not to the same extent as before.
In the report, it states that the impact could vary based on the servicer.
“Not all U.S. residential mortgage servicers will be impacted equally. MSR-holding entities with more interest rate sensitive portfolios would be likely to feel the Brexit effects in terms of earnings and the ability to finance MSRs. This would most likely manifest in accelerated refinance-driven servicer portfolio runoff,” the report stated.
So who is at the top of the hit list?
According to Fitch, “Independent non-bank servicers that do not have associated origination platforms (or where originations lack sufficient scale) and service mostly performing loans are most exposed to MSR volatility stemming from a lower rate environment where prepayments may be higher.”
On the other side, the fortunate servicers that also originate mortgages, as Fitch explains, “have a type of ‘natural hedge’ from the additional revenue brought in by the production of new loans, which may help offset MSR valuation declines.”