CFC: Fee Income Pays the Bill

Countrywide Home Loans CEO Angelo Mozilo says the mathematics of loan servicing have changed dramatically for his company.

In short, Countrywide believes its traditional servicing fee, typically about 25 basis points on conventional, conforming loans, may be virtually pure profit margin. That's right, not servicing fees minus servicing costs equals profit, but pure profit.

That's because ancillary income seems to be paying for the entire servicing department's operational costs.

Extra fees that Countrywide charges its loan servicing customers - such as Internet payment fees and late fees - "far and away pay the entire cost of our servicing operation in terms of personnel," Mr. Mozilo said during an investors conference sponsored by Goldman Sachs last week.

He said fees generate around $17 million to $19 million per month in extra revenue for Countrywide, resulting in a "substantial increase" in the company's loan servicing margin.

And as the company's servicing portfolio grows, the dollar volume of that fee income will rise as well. Additionally, the growing importance of ancillary fees in paying for servicing operations may help lenders persuade other parties that servicing fees can be reduced.

As part of a goal of achieving about 30% market share by 2008, Countrywide has said that it expects to build a servicing portfolio totaling $1.9 trillion in home loans - more than twice the size of the largest servicing portfolio today.

He said that growth is needed to maintain the company's natural hedge between loan production and loan servicing.

"The key is keeping a balance," Mr. Mozilo said. "If you are out of balance, you will get slaughtered in a refinancing boom. You have got to be able to replace what you are losing."

Likewise, having a large origination capacity without a big servicing portfolio leaves a mortgage company unable to compensate for lost loan production income in a rising rate environment, he said.

Achieving Countrywide's growth target assumes the company can increase the size of its portfolio by about a 20% annual between now and then.

In the first quarter of this year, Countrywide serviced $683 billion, accounting for about 9.2% of the market, Mr. Mozilo said. The volume of the servicing portfolio was up 36% from a year earlier.

Describing servicing as an extremely "scaleable" business, Mr. Mozilo said the company has the capacity to double the size of its portfolio today. Each new loan that is added reduces the average cost of servicing per loan, he said.

Mr. Mozilo said that Countrywide's servicing portfolio, in addition to spread income from assets held at its bank subsidiary, provide a source of stable income that should help offset lost loan production revenue as the lending environment becomes more "normalized" and the number of transactions decline.

Mr. Mozilo said Countrywide's rapidly growing bank should have about $120 billion of assets by 2008, up from $26 billion today. Most of those assets are mortgage related, including home equity loans and lines of credit. In addition to originating HELOCs, Countrywide has been buying HELOCs from third parties where some other firm owns the first mortgage.

He said Countrywide has taken some cues from the credit card industry, which he said has done a much better job than the mortgage industry of detecting early warning signs of loan performance problems, in servicing HELOCS.

"We employ credit card servicing and underwriting," he said. "We are employing a lot of that technology and analytics to manage the portfolio."

But he said Countrywide has no intention of getting into the manufactured housing business, saying his previous experiences with that sector left a bad taste in his mouth.

"I will never as long as I'm alive do a mobile home loan again."

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