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Forecasts abound for where interest rates are headed, but what about servicing prices? Will they climb out of the cellar in 1991? We asked some experts for their call on this one and got some well-hedged, yet interesting answers.

"Flat, but firming," is where Walter C. (Terry) Klein, Jr. sees servicing prices going during 1991. Klein, chairman and president of Sears Mortgage Corporation, Riverwoods, Illinois, says there will be "a lot of purchaser interest" coming into play this year that will help shore up prices. Another factor on the positive side of the ledger helping to firm up prices is the recent final rule approved by the Federal Deposit Insurance Corporation (FDIC) on the capital treatment of purchased servicing. The FDIC boosted the amount of purchased servicing that can be counted toward core capital requirements to 50 percent. That should be a plus in "draining the swamp of volume," Klein noted.

One of the factors making it difficult to predict where servicing prices are headed is the prospect of a low interest rate recession. Klein says that could trigger prepayments due to refinancings. Sears Mortgage's refinance volume doubled in the last 45 days, particularly due to ARMs refinancing to fixed-rate loans, Klein said. As a result, Sears saw July-level volume in December.

Klein says some adjustments to servicing pricing levels are in order to account for some recent marketplace developments. Those include the new risks coming from potential escrow lawsuits challenging industry practice on acceptable escrow cushions. Other factors to be figured into pricing in the coming year are the risks tied to a recession that will produce higher unemployment levels, as well as weak real estate markets in some areas that will aggravate losses from foreclosures. Those downside adjustments to pricing may be offset by the fact that less new servicing is being originated because production volume is off. That would help firm prices by holding down the supply.

The Sears Mortgage top executive says that if the Middle East situation ends soon, the downward trend in rates visible before the crisis would continue. Such a development would stimulate home buying because there is still a lot of pent-up demand, Klein says. That would trigger higher prepayments in existing servicing. But then again, the new servicing originated at new, lower coupon rates would be worth more because prepayment likelihood would be remote.

Stephen Hoff, president and CEO, Hamilton, Carter, Smith & Co, Inc., Alexandria, Virginia, says he is already seeing servicing prices starting to firm up. Hoff says the firming is coming from "many more buyers" entering the market in the last few weeks or so. Also, RTC is getting closer to finishing off their marketing of the major portfolios they had in their possession. With the RTC working through their sales, there is less of a perception of an overhang of supply.

Hoff predicts that pricing will "go sideways for the next three to six months and then we expect it to start to rise as the RTC finishes up its sales, as new buyers come in and the business gets back to normal." The main factor that drove prices down in 1990 was the extreme imbalance between supply and demand. But recently, Hoff says, with more people bidding, we are "seeing the extreme imbalance in favor of supply starting to switch. Now the demand side is starting to grow and that's firming up prices."

Hoff notes that although the Fed's move last year to drop short-term rates would normally trigger faster prepayments, the recession environment will "keep a lid on new origination activity even if rates drop." That would prevent a flood of prepayments. Also, the FDIC final rule on the capital treatment of purchased servicing grandfathered in some earlier purchased servicing. Thus, most institutions probably won't be forced to sell a lot of previously purchased servicing to comply, Hoff said. That means the feared, added supply won't be coming to the market to further depress prices. What type of servicing is fetching top dollar? Hoff says conventional, non-recourse servicing on loans from the Maryland and Virginia area is consistently bringing the highest prices. Prices have recently been increasing for California-based servicing, Hoff says. He believes that the rise is due to slower prepayment assumptions being factored into bids.

W.H. (Hal) Hinkle, director of mortgage banking at Goldman, Sachs & Company, sees servicing prices staying depressed through at least the middle of 1991. He says prices will be slightly more depressed in the first half and then stabilizing in the second. The market will see the RTC continue to sell its portfolios, plus "heavy recourse selling." Also, Hinkle sees the "normal sellers" returning to the market in 1991. He says the "surprise of late 1990 was that RTC was the only predominant seller."

Top-quality servicing will continue to net good prices, Hinkle says. But the supply coming to the market "will continue to come from the weaker product," he says.

Gene Lavigne, vice president in charge of servicing acquisitions for Fireman's Fund Mortgage Corporation, Farmington Hills, Michigan, sees the overall supply of servicing coming to the market in 1991 shrinking compared with 1990. "I look for the supply overall to drop in 1991. But I look for private sector supply to increase." Fireman's Fund Mortgage bought approximately $6.5 billion in servicing last year, he said. Lavigne says the RTC has brought the majority of their current servicing holdings to the market by now, and that promises to reduce the supply for sale in 1991. He does not see a lot of change in pricing levels this year and expects GNMA servicing prices to remain depressed. The "substantial lack of quality product" from private sector sellers, particularly in last year's third and fourth quarters, helped boost prices for those portfolios, and that trend could continue in 1991. Lavigne says prices for quality servicing rose by 10 to 20 percent in last year's second half compared to 1989 and early 1990 levels.

Janet Reilley Hewitt Editor in Chief
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No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:forecasts of loan servicing prices
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Date:Jan 1, 1991
Previous Article:Economic trends.
Next Article:Economic prospects for 1991.

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