From deanmortenson on the NRZ board - great catch: PPC-1 today's WSJ:
..in the "Ahead of the Tape" column discusses how the recent spike in mortgage rates has reduced refinancing activity and prepayments, causing MSRs (Mortgage Servicing Rights) to become more valuable. It suggests some banks may write up the value of their MSRs. The article states: "A big part of their value (MSRs) depends on the expected speed of mortgage prepayments. Higher levels of refinancing activity make servicing rights less valuable, since it cuts off the fee stream on which they are based. When rates rise, though, refinancing activity tends to slow, making the rights more valuable."
Basically, the recent one percent increase in mortgage rates since early May has caused refinancing activity to drop sharply. The value of MSRs is very sensitive to the level of refinancing activity--so much so that MSRs can be considered a "call" on higher mortgage rates. Newcastle Financial loaded up on MSRs at attractive prices, and the "base case" CPR (Constant Prepayment Rate) they modeled in presentations on their website is much higher than the current CPR. Newcastle was prescient to load up on MSRs prior to the recent upward move in mortgage rates, and NRZ investors are the beneficiaries of that prescience.