Lower interest rates generally help banks’ mortgage businesses. Except when they don’t. The value of mortgage-servicing rights, which are a key part of banks’ mortgage businesses, got hit by falling rates in the second quarter at Wells Fargo & Co., JPMorgan Chase & Co. and other lenders, dragging on what was otherwise a strong stretch for home lending operations. Mortgage servicing involves collecting payments and performing other administrative duties on home loans, but the value of the rights to service those mortgages drops off when interest rates fall. Wells Fargo, the largest bank holder of servicing rights, said the value of its mortgage-servicing rights dropped 9% from the first quarter to $12.1 billion at the end of the second quarter. JPMorgan, the second largest, said the value of its mortgage-servicing rights fell 15% over the quarter to $5.1 billion. The moves show the flip-side of falling rates, which generally spur borrowers to take out home loans or refinance. The average 30-year fixed mortgage ended the quarter at a rate of 3.73%, down from 4.08% at the beginning of the quarter, according to Freddie Mac data. The Federal Reserve has signaled it is ready to cut rates after several years of raising them, in turn pulling down the cost of borrowing for debt like mortgages. But while lower rates can spur mortgage making, they usually hurt the perceived value of servicing rights. That’s because lower rates make homeowners more likely to refinance their mortgages or otherwise pay them off early, which means the servicer loses that future income stream. It might be a humdrum business, but it’s important to many lenders. Lenders can service mortgages they’ve made, or buy the rights to service mortgages made by other lenders. In their second-quarter earnings reports last week banks disclosed steep declines in the value of these assets. The banks that have reported earnings so far lost between 7% and 10% of fair value in their mortgage-servicing rights portfolios, according to estimates by Mark Garland, managing director at SitusAMC, which advises on servicing transactions. For servicing portfolios, it was the speed of the move that caught many executives off guard. “Mortgage companies do best when rates move steadily in a direction as opposed to rapidly in a direction,” said Stephen Lynch, a credit analyst at S&P Global Ratings, whose coverage includes mortgage firms. “We definitely saw a dislocation.” How have falling rates changed your views on the banking sector? Let the author know your thoughts at ben.eisen@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location. |