Cost of Servicing Drops
It may not have seemed like much of a slowdown, but a Mortgage Bankers Association study shows that the direct expense associated with loan administration declined last year as a result of fewer loan setups and payoffs.
Those improvements helped to make servicing largely a breakeven business last year, as impairment and amortization expense declined from 2003 but continued to weigh on the industry.
The weighted average direct servicing cost, which includes un-reimbursed costs associated with default management, dropped to $80 per loan from $91 in 2003.
Loan servicing productivity improved to an average of 1,188 loans serviced per employee in 2004, from 1,043 loans per servicing employee in 2003.
Reasons for the improved productivity included lower temporary labor costs (down 58%), lower permanent labor expense (down 12%), lower telephone and postal supply costs (down 21%) and improvement in un-reimbursed foreclosure and REO losses (down 32%).
The functional areas that improved the most were post-payoff processing, cashiering, escrow administration and default management. The MBA said these are all areas that benefit from fewer setups and payoffs, or from lower delinquency rates. Delinquency rates began trending down last year and have continued to edge down this year.
The MBA said the indirect costs and losses also declined last year. Indirect costs include items such as un-reimbursed interest expense and corporate allocation payments made to a parent company. Financial costs also dropped last year. MSR amortization and writedowns (net of hedging gains) averaged $397 per loan last year, down from a high of $511 per loan in 2003.
That helped reduce the average servicing loss per loan to just $3 in 2004. By contrast, net servicing losses averaged between $59 and $148 per loan in the years between 2001 and 2003, the MBA said.
The MBA is also working on a sort of "mini" cost of servicing study that will focus on nonconforming loan servicing costs. Marina Walsh, an economist with the MBA, said that the new subprime component of the cost of servicing study will focus on lenders with a high concentration of government loans, alternative-A loans, or subprime credit quality loans.
Not surprisingly, initial indications are that servicing costs weigh more heavily on lenders that specialize in nonprime loans.
"In general, servicing costs were about three times that of the prime side," Ms. Walsh said.
In addition, the nonprime servicers average about 458 loans per employee, compared to a productivity level of almost 1,200 loans per employee on the prime side.
MBA Cost of Servicing Study 2003 2004
Direct Cost of Servicing $91 $80
Loans Serviced Per FTE 1,043 1,188
MSR Writedowns $511 $397
Source: MBA. Dollar figures are weighted average per loan.
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