Companies whose financials have taken hits due to their holdings of mortgage servicing rights are in for a treat, according to Moody’s Investors Service.
Higher rates are expected to improve the capital position of mortgage companies, Moody’s said in a research note Wednesday. And companies that hold MSR assets should expect lower impairments to those assets. The cause of the change in fortunes is rising interest rates.
Under generally accepted accounting principles, the fair value of a company’s MSRs needs to be mark-to-market and that can affect financial results. In a rising rate environment, loans underlying the MSRs are less likely to prepay, increasing their value.
“The prolonged low interest rate environment has led to significant declines in MSRs, eroding the capital and profitability of U.S. nonbank mortgage companies that hold MSRs, but relief is on the way,” Gene Berman, a Moody’s assistant vice president and analyst, said in a news release.
Moody’s said that the fourth quarter should show a “significant reversal” of the decline of MSR fair values that was reported for the first nine months of 2016. Among the companies that Moody’s expects to benefit the most from rising interest rates are Nationstar Mortgage Holdings and Walter Investment Management Corp. These companies experienced material reductions in MSRs at 10% and 23% of fair value, respectively, Moody’s said.