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Valuation of a Mortgage Company's Servicing Portfolio

Published online by Cambridge University Press:  19 October 2009

John J. McConnell
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Extract

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 3 , September 1976 , pp. 433 - 453
Copyright
Copyright © School of Business Administration, University of Washington 1976

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References

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