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Valuation of a Mortgage Company's Servicing Portfolio

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  • McConnell, John J.

Abstract

This paper presented a stochastic discounted cash flow model with which mortgage companies can assess the value of a mortgage servicing contract. The model was illustrated with data provided by a group of eight MBC's. Simulation and sensitivity analysis showed the impact of different mortgage amounts, termination distributions, and expected rates of servicing cost increases on the value of a mortgage servicing portfolio. In general, because servicing contracts are long-term fixed revenue arrangements, high rates of servicing cost increases substantially reduce the value of an MBC's servicing portfolio. To the extent that mortgage prepayments are reduced by high inflation rates, the impact of high cost increases on the value of a servicing portfolio is compounded.

Suggested Citation

  • McConnell, John J., 1976. "Valuation of a Mortgage Company's Servicing Portfolio," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(3), pages 433-453, September.
    • Handle: RePEc:cup:jfinqa:v:11:y:1976:i:03:p:433-453_02
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    Cited by:

    1. Chiang, Shu Ling & Yang, Tyler T. & Tsai, Ming Shann, 2016. "Assessing mortgage servicing rights using a reduced-form model: Considering the effects of interest rate risks, prepayment and default risks, and random state variables," Journal of Housing Economics, Elsevier, vol. 32(C), pages 29-46.
    2. Che-Chun Lin & Ting-Heng Chu & Larry Prather, 2006. "Valuation of Mortgage Servicing Rights with Foreclosure Delay and Forbearance Allowed," Review of Quantitative Finance and Accounting, Springer, vol. 26(1), pages 41-54, February.
    3. Jedidi, Helmi & Dionne, Georges, 2019. "Nonparametric testing for information asymmetry in the mortgage servicing market," Working Papers 19-1, HEC Montreal, Canada Research Chair in Risk Management, revised 28 Oct 2019.

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