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There is much discussion in trade, accounting and regulatory literature about the value of servicing. Most of this focuses on "fair value." Fair value is generally defined as the amount at which an asset could be bought or sold in a current transaction between willing parties. Any relationship between fair value and servicing worth, however, is purely coincidental. Fair value may change significantly from quarter to quarter; worth rarely does.
Fair value for servicing rights is simply the price at which a portfolio could be sold. This price, while important for accounting and regulatory purposes, may not represent worth for a variety of reasons.
First, uncertainty tends to decrement price. If buyers in the marketplace do not have complete knowledge of the prepayment, credit and operational risks inherent in a portfolio, they will tend to be conservative and assume the worst. And, by definition, they will not have complete knowledge.
Second, if a portfolio is brought to the auction market, it is probable that a series of bids will be received. It is not atypical to receive a dispersion of bids. There is often a bottom-fisher, hoping the rest of the market is asleep. There are usually a series of bids that are fairly tightly banded. And, of course, there is the winner-the highest bidder.
There has been discussion among valuation analysts as to whether the fair value should be the price you would get with high reliability (i.e., the tightly banded bids) or the price you could get (i.e., the highest bid). In all probability, neither offers a good representation of worth.
Third, and most important, is the fact that fair value ignores the influence of the entity that owns it. As a great football quarterback can excel or fail based on his team association, a servicing portfolio can thrive or wither based on its corporate ownership. The worth of the quarterback or servicing portfolio...