Servicing value--a zero-sum game

August 31 mortgage servicing values dropped approximately 15% to 20% from a month earlier. This appears to be the result of the government's latest Sisyphean effort to buoy real estate prices. Treasury rates have been pushed down to their lowest levels since Pres Eisenhower began his administration. The actuality of lower long-term rates and the possibility of a government-endorsed refinance program have stressed the mortgage markets. While many argue that originations tend to act as a natural hedge to servicing, a major weakness of this argument is that servicing impairments are predicated upon projected refinances, while origination gains are based on actual loans produced. Today's lower rates have inflated pipeline values. The best that servicers can hope for is that the Federal Housing Finance Agency fails to implement the latest enhancements to its refinancing program for agency loans.