Mega-Servicers Score Highest
Washington-Servicers participating in the annual cost study put out by the Mortgage Bankers Association turned a profit and kept costs under control last year, but increasingly the largest firms are pulling way ahead of the pack in terms of achieving operational efficiencies.
But while big companies managed to eke out productivity gains last year, an economist at the MBA says rising delinquencies and defaults will put pressure on servicing expenses going forward.
Last year, participants in the MBA's cost study earned an average of $109 in financial income per loan from servicing, almost double the amount reported in 2006. The increase reflected higher servicing fees (driven by larger loan balances) and better valuation and hedging results for mortgage servicing rights. The economic environment also meant servicers faced less portfolio "churning" as a result of refinancing.
But some of the study's real surprises came from their operational results. Direct servicing net income, which measures servicing and ancillary fees minus expenses, rose to $430 per loan in 2007, up from $406 in 2006.
Average servicing fees rose from $489 in 2006 to $511 in 2007. The average loan balance rose 7% to $152,251 in 2007.
Direct servicing expense actually fell to $81 per loan last year, down from $83 the year before. But servicing expenses remained higher than in 2004 and 2005, near the peak of the housing boom.
The largest cohort of servicers in the study - with an average portfolio size of 1.5 million loans - had an average direct expense of $79 per loan, while the smallest peer group reported direct expenses averaging $358 per loan. That smallest peer group consisted of firms that service fewer than 500 loans, however.
But even servicers with portfolios of between 5,000 and 50,000 loans reported significantly less operational income from servicing than the largest group.
Among all firms in the study, the number of loans serviced per employee rose to 1,398 in 2007. Marina Walsh, the MBA's associate vice president for research and economics, said that increased outsourcing is the most likely reason for the increase in loans serviced per employee.
But there was a wide disparity between small and large servicers that may portend more consolidation within the industry. The smallest servicers had direct servicing costs (which excludes things like hedging and valuation adjustments) that were three times as high as the biggest firms.
The improved profitability probably reflected lower portfolio churning, Ms. Walsh said.
"Those companies that did have servicing actually were helped to some extent," she said.
Even more surprisingly, servicing productivity improved as well, with servicers managing 1,398 loans per employee.
Ms. Walsh said that it's possible the 2008 data will reverse the positive trends, as rising defaults may put downward pressure on the value of mortgage servicing rights and put a dent in servicing productivity.
The data also may portend continuing consolidation in the servicing sector. Smaller servicers on average had direct servicing expenses that averaged three times higher than the largest servicers.
The MBA estimates that the 180 firms that participated in the study accounted for 43% of industry origination volume in 2007 and managed 44% of residential mortgage debt outstanding. The survey does not include many subprime lenders.
Overall, the firms in the study were "minimally profitable" in 2007, according to Ms. Walsh. Participating firms posted average pretax net financial income of $900,000, down from an average of $6.4 million in 2006.
But the profits weren't shared equally. Subsidiaries of larger financial firms performed better than independent mortgage banking firms and privately held companies, Ms. Walsh said.
"It really helps to be part of a well-capitalized bank," she said.
And participants in the study likely represent most of the stronger firms in the industry. The MBA cost study includes independent mortgage banks and mortgage banking subsidiaries of other financial institutions, but largely excludes subprime lenders.
Net marketing income, which includes the gain or loss on the sale of loans in the secondary market, pricing subsidies and overages, as well as capitalized servicing and servicing-release premiums, declined from $2,180 in 2007 to $1,920 in 2007.
The MBA said the drop in secondary market income would have been more pronounced had capitalized mortgage servicing rights been excluded.
Lenders also were squeezed on the warehouse side of the equation as the net interest spread between the mortgage rate on the loan and the interest rate paid on the warehouse line of credit dropped to $175 per loan in 2007 from $245 in 2006.
Meanwhile, the actual net cost of originating a loan rose to $2,655 in 2007, up from $2,476 in 2006. But the data also show that lenders were cutting overhead and capacity as the market started to falter.
"If you look at expenses, that's the one item that sort of stands out. You really see that in 2007 there were efforts to curb gross operating costs. The problem is that production also dropped," Ms. Walsh said.