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.