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Refi Woes

Cendant takes $175 million write-down on servicing rights

September 26, 2002


The record number of Americans currently refinancing their mortgages is taking its toll on companies that service real estate loans. Cendant Corporation announced yesterday that it will take a massive write-down on its servicing assets.

Cendant, which says it is the world's largest real estate brokerage franchisor and hotel franchisor, said that it will take a $175 million write-down on the carrying value of its mortgage servicing rights asset. The noncash write-down was attributed to a steep decline in the interest rates that caused mortgage loan prepayments and refinancings to increase to record levels. Cendant said it determined that the servicing rights asset will be reduced in accordance with generally accepted accounting principles -- which require a revaluation to the lower of cost or market value at each quarter end.

Sister companies CENTURY 21, Coldwell Banker and ERA provide customers for the Cendant Mortgage subsidiary.

"It now appears that the models we have used to value the MSR (mortgage servicing rights) asset in the past are not as effective in estimating the volume of prepayments and refinancings that are occurring in this new environment," said Kevin M. Sheehan, chief financial officer of the New York-based company. "While the level of prepayment activity of our servicing portfolio remains below the industry average, our existing valuation model and the risk management strategies used to hedge against reductions in interest rates under-estimated the velocity of refinancing due to the rate shocks experienced in the last 30 to 40 days."

Earlier this month, the Mortgage Bankers Association of America reported that mortgage loan refinances were at their highest level of activity ever.

Fannie Mae recently announced that its duration gap -- a measure of how well it hedges its interest rate risks -- was a negative 14 months in August, compared to a positive five months just last March. While the mortgage giant says it is not unusual for a duration gap to turn sharply negative during a period of heavy refinancing, investors disagree -- pushing Fannie's share price down to its 52 week low of $61.50 yesterday.

Cendant said that as a result of the charge, adjusted earnings per share has been reduced from $0.42 to $0.28.

Sam Garcia has been in mortgage lending since 1980, and is publisher of MortgageDaily.com. He also owns and operates CloseNow.com, a real estate portal site.

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