Churning Takes a Toll

New Orleans-Refinancing may be a boon to loan originators, but loan servicers are finding that the longest refi boom in history is taking a toll on their productivity.

Specifically, the direct costs of servicing loans rise as a result of portfolio "churning." A heavy load of loan boarding and loan satisfaction activity has strained the industry, according to Michael Borum, a Chase Manhattan Mortgage executive who spoke at the MBA's National Mortgage Servicing Conference.

Direct expenses for loan servicing totaled $79 per loan in 2001, as the current refinancing boom was taking off, according to data from the Mortgage Bankers Association of America. In 2000, a more placid year, direct expenses totaled $71 per loan.

The heavy pace of portfolio churning is also putting a strain on loan servicing staff, according to the MBA data. The MBA's cost of servicing study found an 11% drop in the number of loans serviced per full-time employee in 2001.

Whereas lenders reported servicing 1,162 loans per employee in 2000, that figure fell to 1,034 per employee in 2001.

However, the MBA has also found some good news for servicers. The average size of loans in servicing portfolios continues to grow, to $105,000 in 2001.

And ancillary income has risen 28% since 1998, Mr. Borum said. Lenders are collecting more fee income from payoffs, insurance sales and late fees.

Still, refinancing has put a financial burden on servicing shops, most notably in the form of amortization and impairment costs. Net financial income per loan fell to $44 in 2001, down from a gain of $111 in 2000.

And so far, the MBA has found little evidence that mega-servicers are capitalizing on economies of scale to beat their smaller competitors in terms of servicing performance.

"The small servicers and the midtier servicers have performances that are better than the mega-servicers," Mr. Borum said. Tony Ebers, executive vice president for home loan servicing at IndyMac, said studies have found 52 distinct cash flow items associated with loan servicing, providing lenders with a variety of opportunities to maximize loan servicing income.

"It is all about maximizing mortgage duration and maximizing our returns," he said at the MBA conference.

Escrow income and "float" interest income are the second biggest engine of servicing profits, he said.

Late fees, prepayment penalties and cross-sell income also provide servicers with a chance to improve their financial performance, he said. To maximize these variable sources of income, he said lenders "need to get very granular," understanding individual borrower behavior and loan product characteristics.

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