America's Four Biggest Banks To Take $55 Billion Write-down On Mortgage Servicing

Bloomberg reports that Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. increased the value of their contracts in the last quarter. Now they're going to have to reduce them.

We're talking mortgage-servicing rights or MSRs, by 26 percent in the quarter as mortgage rates climbed by about 0.35 percentage point. Net gains on the contracts added more than $1 billion to Wells Fargo’s record earnings in the quarter and $1 billion to JPMorgan’s first-quarter profit.

These four banks handle collections of $6 trillion worth of mortgages. That's 56% of the market. Costs are rising for servicing this.

Accounting rules are going to force the banks to admit massive losses. It is hard because there is no trading in these contracts which makes it difficult to determine their worth.

We're talking about a depressing accounting game.

Bloomberg says: Servicers collect payments from borrowers and pass them on to mortgage lenders or investors, less fees. They also keep records, manage escrow accounts and contact delinquent debtors.

The value of the rights depends largely on the expected life of the mortgage, which ends when a borrower pays off the loan, refinances or defaults. When rates drop and more borrowers refinance, MSR values decline. Banks typically hedge those movements using interest-rate swaps and other derivatives.