Cendant Corporation To Reduce Valuation Of Mortgage Servicing Asset Company

Cendant Corporation announced that it’s earnings will be reduced by approximately $175 million, or $0.17 per share, in third quarter 2002 due to a non-cash write-down of the carrying value of its mortgage servicing rights (MSR) asset, which is the capitalized value of expected future servicing earnings. The impact of this reduction in earnings is partially offset by strength in other Cendant business units. As a result, the Company’s forecast for third quarter adjusted EPS has been reduced from $0.42 to $0.28 per share.

Cendant’s previously announced projection for fourth quarter 2002 adjusted EPS of $0.29 is unchanged. For 2003, the Company’s preliminary adjusted EPS expectation is $1.55 to $1.60. As a result of the revision to the Company’s third quarter forecast, the adjusted EPS from continuing operations for 2002 is now expected to be $1.26. In the third quarter, a steep decline in the interest rates on ten-year Treasury Notes and 30-year mortgages has resulted in the lowest interest rate levels in 41 years. As a result, the Company said, mortgage loan prepayments and refinancings by homeowners have increased to record levels.

This rise in mortgage prepayments has, in turn, caused Cendant to determine that its MSR asset will be reduced in accordance with generally accepted accounting principles (GAAP), which require a revaluation to the lower of cost or market value at each quarter end. Based on the unprecedented amount of refinancing caused by historically low interest rates, it now appears that the models we have used to value the MSR asset in the past are not as effective in estimating the volume of prepayments and refinancings that are occurring in this new environment.

Kevin M Sheeham, Cendant’s chief financial officer said, “While the level of prepayment activity of our servicing portfolio remains below the industry average, our existing valuation model and the risk management strategies used to hedge against reductions in interest rates under-estimated the velocity of refinancing due to the rate shocks experienced in the last 30 to 40 days. As a result, we are adopting a recently released valuation model and revising certain of our assumptions in order to better reflect the sensitivity of our MSR asset value to consumer behaviour.” He further added, “With our continuing risk management activities, and the adoption of the new valuation model with revised assumptions, we believe the company has enhanced its ability to value our MSR portfolio. The charge reflects both the adoption of the new valuation model and an adjustment to the value under the existing model due to the lower interest rates. However, the company is currently benefiting, and will continue to benefit, from the increase in refinancing activity, as mortgage originations remain at record levels.”