Comments on: The mortgage-servicing writedowns A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: M Thu, 22 Oct 2009 15:37:46 +0000 26 bps over a 30 year or even a 20 year period is a lot!
I have not looked into any of the details, but just as a general comment, duration is the key word here.

By: Griff Thu, 22 Oct 2009 14:56:01 +0000 Wells Fargo’s investor release for Q3 earnings includes the summary copied at bottom. Further into the PDF, a main comment about changes in MSR value is that interest rates & prepayments influence that value the most (above all else). The decrease (or increase) in prepay assumptions impacts greatly the valuation (much like it would for an agency 30yr MBS-backed strip IO).

I would like to hear what the hedge-carry income entails, all the same.

“$1.5 billion combined market-related valuation changes to mortgage servicing rights (MSRs) and economic hedges (consisting of a $2.1 billion decrease in the fair value of the MSRs more than offset by a $3.6 billion economic hedge gain in the quarter), largely due to hedge-carry income reflecting the current low short-term interest rate environment, which is expected to continue into the fourth quarter; MSRs as a percentage of loans serviced for others reduced to 0.83 percent; average servicing portfolio note rate was only 5.72 percent. “

By: Andy Thu, 22 Oct 2009 14:48:12 +0000 Felix,
Is this really your question:
“There also seems to be a strong correlation between the size of the writedown that a bank took, on the one hand, and the degree to which its hedges made money, on the other. Is there any good reason why this should be the case?”

Isn’t this strong correlation exactly what one would expect if the banks are effectively hedging the MSRs?

Perhaps there’s more to it than that, but it seems that you’re ignoring the very reason the hedges exist in the first place. If your question is, rather, “Why do the banks appear to be over-hedging?”, I don’t have an answer for that.