Also, since the housing crisis, Lee explained that the market has been generally undervaluing servicing rights from credit unions.

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

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

MSRs from credit union originated loans might also have been hurt by the relatively good quality of mortgage loans, Lee noted. Credit union mortgage loans have had very strong quality in comparison 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 CUs sell them? Lee said a variety of different factors can lead to a credit union deciding to sell the MSR along with the mortgages.

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

Lee explained that mortgage servicing rights are an asset, but one whose value and price can fluctuate rapidly due to market conditions or prepayment expectations. Further, while servicing a small portfolio of mortgages might not be too expensive, Lee said the costs can mount as operational aspects of the servicing become more complex and labor intensive.

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

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

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