The nation's top home mortgage lenders markedly increased their servicing portfolios in first half of 1994. despite turmoil in the industry.
The 100 largest players boosted their servicing volume by about 4% or nearly double the growth of the mortgage market at large, according to an American Banker survey. The top 10, meanwhile, notched a 10% gain. (Complete tables begin on page 11.)
The jumps are good news for an industry that has been rocked by the abrupt end of a long refinancing boom. With rising interest rates sharply curbing loan demand, income from mortgage originations has plummeted.
"The revenue source of 1994 will be servicing," says Jack Pierce, senior vice president, First Union Mortgage Corp., Charlotte, N.C.
Adds David S. Dusenbury, an analyst at CS First Boston: "The role of the servicing portfolio is now real, real important."
Servicing entails funneling monthly payments from homeowners to holders of mortgage-backed securities. For the work, servicers usually earn 0.20% to 0.45% of the amount of loans serviced.
The business has been helped greatly by a slowing of early repayments. Heavy refinancing last year meant loans prepaid faster than expected. The quick prepayments drained servicing portfolios, often requiring big writedowns of servicing assets.
Not so today. Higher interest rates are making servicing more profitable because it isn't feasible for borrowers to refinance.
"Servicing is back in style and production is falling out of style -- because production is losing money," said Brian O. Casper, executive vice president, Crossland Mortgage Corp., Salt Lake City.
Crossland's servicing portfolio mushroomed by 52% in the first six months of the year, to $10.4 billion, as a result of its purchase by First Security Bank.
Some of the largest portfolio expansions in the first half of 1994 were a result of servicing purchases.
AmSouth Mortgage Co., Birmingham, Ala., grew its portfolio 48%, to more than $9 billion -- the fourth-largest percentage gain during this period, according to the survey. Judith P. Kent, an AmSouth executive vice president, said purchases of other banks and their portfolios were the cause.
The servicing portfolio at Citizens Mortgage Corp. topped the list of growers.
The Atlanta lender's portfolio increased by nearly 100%, to $8.7 billion, as a result of a bank purchase and a combination of two portfolios.
Purchase prices for servicing portfolios have also been going up.
Steven Hoff, chief executive officer of Hamilton, Cutter, Smith & Co., a Beverly Hills servicing brokerage outfit, said prices for servicing rights surged as much as 20% from January to June.
As servicing portfolios have grown, lenders have been implementing changes in their servicing methods.
First Union has recently formed its loan service agents into teams. The teams are assigned to customers as opposed to regions.
Mr. Pierce said that First Union expects the change to improve its service and "take us one step closer to our customers."
An 800 telephone line now feeds customers to their designated First Union agent.
"We have recognized the cost of not providing good service," he said.
Bucking tradition, companies like Countrywide Credit Industries, Pasadena, Calif., and Norwest Mortgage Inc., Des Moines, have been opening multiple servicing centers. Previously, the prevailing wisdom was that big, single servicing centers meant economies of scale and higher profits.
Nature, literally, has rained on the old theory. Earthquakes and floods across the nation have debilitated some lenders for periods of time. Having another service center in, say, Plano, Tex., as Countrywide does, acts as an emergency plug.
Lenders say keeping an array of servicing centers can provide labor-market diversification. In other words, a run-up in wages in any one market shouldn't prove too costly.
First Union, which expects to operate as many as four servicing centers in the near future, says the strategy is mainly intended to boost service quality.
"If you get a shop too large, you lose your human touch, it gets away from you," Mr. Pierce said.
Of course, not all lenders have been growing in servicing. California Federal Bank, Los Angeles, suffered a 56% decline, citing sales of servicing rights and runoff related to refinancings.
Meanwhile, the big thrift has been rethinking its approach to the business.
It has outsourced three major operational tasks since the year began: foreclosure notification and processing and the tracking of hazard insurance and delinquent taxes.
The idea was to put these operations "in the hands of someone who has that specific expertise," said Donald L. Black, senior vice president.
California Federal is also borrowing a method of employment from the production side of mortgage banking.
The thrift's servicing staff no longer consists of strictly full-time employees. A selection of part-time and temporary employees will help CalFed handle extreme fluctuations in loan volume, Mr. Black said.
Technology has played a prime role in improving the efficiencies of servicing over the years.
But the advancements are coming more quickly now, lenders say.
For example, they say imaging -- using digitized images of documents rather than paper -- finally appears to be making its way into mainstream servicing operations.
AreSouth Mortgage has started to use networks of personal computers to process loans before feeding the information into large mainframe computers at day's end. Small networks allow managers to update and check information more easily, Ms. Kent said.
She is not convinced, however, that present-day, cutting-edge technology will revolutionize servicing.
"In the long run, reengineering the process and finding more ways to exchange data will be the things that will really give us the efficiencies in our process," she said.
