I did not say that you said they bet on rates.
What I said, is that the MSR valuation is rate sensitive. That means it's a very volatile asset. And, it's completely outside of the control of the company.
A longstanding criticism of Mortgage Banking companies is that there is simply too much earnings volatility.
the way a mortgage banking company counters this issue is by hedging the MSR. If the MSR value goes up, then you take a loss on the hedge. the goal is to be P&L neutral.
If a company did NOT hedge the MSR, then they are essentially making a "bet" that rates are going up and they will be able to take the MSR valuation gain without the corresponding hedge loss.
Conversely, if a company thought rates would drop, then they would almost certainly hedge the MSR and take a gain on the hedge to offset the MSR Valuation loss.
But you cant just switch back and forth between hedging an MSR or not. Investors distaste for earning volatility essentially force most mortgage companies to hedge the MSR, which renders it's earnings contribution to be limited to a fee based business.
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