As interest rates have dipped and more CUs have opted to selltheir mortgages onto the secondary market, they have faced adilemma: will they or won't they sell the servicing rights?

Mortgage servicing rights are contractual agreements where therights to service an existing mortgage are sold by the originallender to another party who takes over the administrative dutiesfor a fee. Common rights included are the rights to collectmortgage payments monthly, to set aside taxes and insurancepremiums in escrow, and to forward interest and principle to themortgage lender.

Credit unions have traditionally opted to keep their servicingrights if they sold their mortgages, according to Robert Lee,senior vice president with the Mortgage Industry Advisory Group, aleading mortgage consultancy.

“Primarily, credit unions have wanted to keep their servicingrights because they want to keep the relationship with the member,”Lee explained. CUs have wanted to be in position to interact with amember who's paying on a mortgage that they originated, he noted.In addition, if a member has become a member to take advantage ofthe mortgage, continuing the servicing offers additionalopportunities to cross sell other products.

Also, since the housing crisis, Lee explained that the markethas been generally undervaluing servicing rights from creditunions.

“It can be very hard now to get a good price for mortgageservicing rights,” Lee said, adding that “credit union mortgagesare of such good quality that they usually sell at a premium. Butthe market has been so weak since the housing crisis began thatcredit union MSRs have not been valued as highly as they shouldbe.”

Lee explained that a number of different factors feed intomortgage servicing rights value, including credit quality of theborrower and the likelihood that a borrower will prepay an existingmortgage by refinancing. Both delinquent borrowers and early payingborrowers hurt MSR value but in different ways, he explained.Delinquent borrowers hike servicing expenses as those borrowersrequire more work to service their accounts, while borrowers whoprepay or refinance their mortgages cut the servicing income theirmortgage would otherwise generate.

MSRs from credit union originated loans might also have beenhurt by the relatively good quality of mortgage loans, Lee noted.Credit union mortgage loans have had very strong quality incomparison with others, but in the wake of the housing crisis,almost all lenders are writing higher quality loans, he said.

But if there's a strong case for keeping MSRs, why do some CUssell them? Lee said a variety of different factors can lead to acredit union deciding to sell the MSR along with the mortgages.

First, sometimes mortgage buyers in the market insist uponbuying the servicing rights and will offer a better deal for themortgage loan if it comes with those rights, and that can be apositive reason to possibly sell the rights, Lee explained.

Lee explained that mortgage servicing rights are an asset, butone whose value and price can fluctuate rapidly due to marketconditions or prepayment expectations. Further, while servicing asmall portfolio of mortgages might not be too expensive, Lee saidthe costs can mount as operational aspects of the servicing becomemore complex and labor intensive.

Credit unions that are determined not to sell their servicingrights might also consider outsourcing the servicing, Lee said.This can cut into their income potential but make themsignificantly easier to manage.

He also said some credit unions with large MSR portfoliossometimes hedge against the risk that interest rates could fallbelow the average rates of their mortgages, leaving them open tothe possibility of being refinanced. The downside of hedging, ?hesaid, is that it tends to be both complex and expensive.

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