A Capital Markets View of Mortgage Servicing Rights

Abstract

This article describes a consistent framework for the valuation and hedging of mortgage servicing rights using the interest-only (IO) securities markets. It explores the similarities and differences between the mortgage servicing and IO securities markets. After discussing some of the characteristics and risks inherent in an investment in mortgage servicing rights, the authors use option pricing techniques to look at mortgage servicing valuation in the context of IO market valuations. Results show the relationships between the two markets.