Mozilo: MSR Growth Key to Profitability
Countrywide has made no bones about its ambitious growth plans, and in a recent speech to investors, chairman and CEO Angelo Mozilo illustrated how the company plans to leverage its huge mortgage servicing portfolio to generate profits across the enterprise.
And while Countrywide expects to see lots of merger and acquisition activity taking place in the industry, Mr. Mozilo made it clear that Countrywide hopes to continue picking up market share primarily through organic growth. In the current "transition" environment facing the mortgage industry, he said Countrywide is poised to gain share by hiring talented originators.
Countrywide reiterated its goal of attaining about a 30% share of the mortgage origination market by 2010, and Mr. Mozilo underscored its concurrent goal of attaining 20% of the mortgage servicing market in a talk at a recent Sanford C. Bernstein conference. Currently, Countrywide's servicing market share stands at about 12%.
Countrywide believes that over time it can effect an "opportunistic shift toward recurring spread income" in place of gain-on-sale income, Mr. Mozilo said.
He said achieving a 20% share of the mortgage servicing market is achievable, noting that between 2000 and 2005, Countrywide grew its portfolio at an annual rate of 31%, while industrywide the servicing market grew at an annualized rate of 13%.
And he said technology will help Countrywide manage its portfolio, which totaled over $1.1 trillion in home loans at the end of the first quarter.
"We believe we have the best tech in the industry. In fact we believe we are a technology company that is in the financial services business." Countrywide more than doubled its servicing market share during that time period, fueled in part by recapturing its existing customers who refinanced.
Mr. Mozilo said Countrywide recaptured 35% of loans that prepaid in 2005. In addition, 87% of Countrywide's home-equity loan production came from existing customers who have a first mortgage with Countrywide.
"By the way, none of the cross-selling value is captured on the balance sheet relative to MSRs," he said.
He said the mortgage relationship and investment accounts form the strongest customer relationship, allowing Countrywide to leverage its mortgage customers for growing the bank's customer base.
"We intend to mine the customer assets in the mortgage bank and bank for long-term growth."
And growth of the MSR portfolio aids Countrywide's equally ambitious goals for growing its commercial bank, providing opportunities to benefit from escrow deposits on the mortgage servicing accounts, for example.
Mr. Mozilo said having the bank allows Countrywide to be more innovative in introducing new home loan products, such as pay-option ARMs, which can be held in portfolio. Countrywide can also cross-sell bank products to its mortgage customer base.
While acknowledging that pay-option ARMs have more credit risk than most home loans, Mr. Mozilo said they carry less interest rate risk. The underlying loan-to-value ratio on Countrywide's pay-option portfolio is 78%, he said. The average FICO credit score is 721.
But he said concern about "payment shock" facing option-ARM borrowers may be overstated. Home loan customers are increasingly sophisticated about financing options, and many could refinance into cheaper products or take advantage of new teaser rates if indeed the payment increased dramatically, Mr. Mozilo said.
As for the state of the housing market, Mr. Mozilo said a slowdown in home price appreciation should not precipitate a wave of defaults as long as the economy keeps growing. However, he said some markets are more vulnerable than others.
"You are going to have some regional issues. Condos are going to be the most vulnerable as you see some price pressure," he said.
Across the industry, Mr. Mozilo said he expects to see more M&A activity. Recent mortgage mergers are "just the beginning of the major consolidation that will be taking place over the next several years," he said.
He said that Wall Street stalwarts, including Merrill Lynch, Morgan Stanley, J.P. Morgan Chase and Lehman Brothers, "have all made comments publicly that they are looking to acquire assets in the mortgage origination or servicing sectors."
SNAPSHOT: Countrywide's Servicing Portfolio
April 2006 $1,164 Billion
Year-End 2003 $645 Billion
Year-End 2000 $285 Billion
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