Mortgage Servicing Rights Research Articles

Valuing US and Canadian mortgage servicing rights with default and prepayment

The increasing use of securitized mortgage throughout the world has led to the creation of an asset class, the mortgage servicing right (MSR). The typical MSR used in the United States and Canada is a contract between the owners of a pool of residential mortgages and a financial institution under which the institution provides retail-level services to borrowers. This paper presents an options-based MSR valuation mode that incorporates both prepayment and default. Numerical results indicate that the MSR value is sensitive to interest rate and housing volatility parameters, as well as to the correlation coefficient between those parameters.

Investor Valuations and Measuring Bank Intangible Assets

This paper examines the value-relevance and reliability of bank intangible asset measures. The majority of bank intangible assets are not recognized and few banks voluntarily disclose estimates or provide other information about these assets. Investors therefore have limited direct information about this important component of bank value. I incorporate publicly available financial and market information to estimate four customer-based intangible assets: mortgage servicing rights, credit card intangible, core deposit intangible, and trust operations intangible. I find my estimates are value-relevant, increase the explanatory power of a valuation model compared to one containing balance sheet amounts; and, with the exception of the mortgage servicing rights, are more reliable than balance-sheet amounts and estimates derived from simple algorithms used in prior research. Intangible assets that are not separately reported (core deposit and trust operations intangibles) or that are reported by few banks (credit card intangible) drive the results. These intangible assets are also not subject to separate accounting recognition standards such as SFAS 122 for mortgage servicing rights, where I find weaker results. The evidence of value-relevance and reliability of intangible asset estimates based on current disclosures (and recorded mortgage servicing rights) suggests the existing financial reporting requirements provide useful information about intangible assets and change may not be necessary.

A Capital Markets View of Mortgage Servicing Rights

A Capital Markets View of Mortgage Servicing Rights

A Capital Markets View of Mortgage Servicing Rights

This article describes a consistent framework for the valuation and hedging of mortgage servicing rights using the interest-only (IO) securities markets. It explores the similarities and differences between the mortgage servicing and IO securities markets. After discussing some of the characteristics and risks inherent in an investment in mortgage servicing rights, the authors use option pricing techniques to look at mortgage servicing valuation in the context of IO market valuations. Results show the relationships between the two markets.

Market value and accounting implications of off-balance-sheet items

This paper examines the value relevance of a previously unexplored off-balance-sheet asset: originated mortgage servicing rights. Also, it provides evidence regarding an assertion that mortgage bank managers manage their reported earnings by swapping portfolios of originated servicing rights with other servicers. The evidence suggests that despite the absence of originated servicing rights in the balance sheet, they are priced by investors. Regarding the earnings management assertion, the evidence suggests that firms facing net losses before recognizing gains on sales of servicing are more likely to recognize discretionary gains, ceteris paribus. This work makes several contributions: (1) It provides evidence about investors' valuation of off-balance-sheet items in a setting where the sample firms are homogeneous and the item in question is of substantial economic importance to the firms; (2) It provides evidence regarding an off-balance-sheet item that has not been studied previously; (3) It provides a test of earnings management in a setting that does not require the estimation of discretionary accruals; and (4) It investigates an issue of current interest to accounting policy makers and to firms in the mortgage banking industry.

The value of tax benefits and the cost of liquidating versus selling failed thrift institutions

This paper examines the 205 insolvent thrifts that were resolved in 1988 and assesses the cost savings obtained by selling 179 of the institutions through assisted acquisitions rather than liquidating them. It is hypothesized that the cost savings were determined by factors related both to the future viability of the acquired institution and the particulars of the deal arranged by the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation. The added value by selling a thrift is determined primarily by the level of core deposits obtained by the acquired thrift. However, the branch structure and purchased mortgage-servicing rights should also add franchise value to the firm. In addition to these factors, the analysis accounts for the tax benefits and other regulator forbearances associated with the deals. Other characteristics of the deals are also considered. It is found that core deposits, tax benefits, purchased mortgage-servicing rights, average branch size, and type of acquirer, as well as some other factors, were significant determinants of the cost savings obtained through selling an institution rather than liquidating it.