Friday, April 25, 2008
Lehman Mortgage Servicing Rights
Lehman also booked a $364 million pretax gain on changes in the value of mortgage-servicing rights, which are treated as an asset because they represent the future cash flows from fees borrowers pay to the companies that collect mortgage payments. The value of these rights changes depending on expectations of things like the future direction of interest rates, risk associated with mortgages and, most importantly, the likelihood that investors will prepay their loans. When expected prepayments decline, holders of servicing rights see gains. Prepayment rates have been dropping since last year because fewer people can refinance mortgages.