The nontraditional retail channel for mortgage originations is made up of companies that serve niche markets or use telephone marketing as a central facility.

Many companies struggling with the need to increase production have sought to take advantage of this channel, which has historically reduced loan origination costs considerably.

Unfortunately, many companies use the channel for refinancing only. Given the growth of the Internet and borrowers' increased acceptance of technology, more lenders may consider going directly to the consumer.

Although loan volume via the Internet is not significant now, it may be prudent for companies to position themselves immediately to reap potential benefits from this low-cost channel .

The total direct cost of originating nontraditional retail loans, $2,700, was not much lower than the traditional retail channel cost of $3,000. However, a company that effectively utilizes this channel by increasing production volume could gain a competitive edge.

Another channel of production, broker/wholesale, shows spreads that suggest its profits are declining almost as quickly as the retail channel's. In broker/wholesale, the average net loss before applying a value for servicing rights purchased was $1,900 per loan in 1995, compared with $1,950 per loan in retail. But average loan balances are 35% higher for broker/wholesale loans than for retail loans.

Evaluating the net loss in basis points, which widens the difference, gives broker/wholesale a loss of 115 basis points and retail a loss of 180 basis points.

As with all channels of production, the largest component of broker/wholesale costs was acquisition - payments to the broker and the broker account executive - which averaged 83 basis points in 1995. The volume of origination per account executive was nearly $50 million in 1995, versus $30 million in 1994. The average productivity for broker/wholesale (at 74 loans per direct employee) was better than the retail-channel productivity of 26.

For the correspondent channel, acquiring servicing is an important part of total cost. However, leaving this expense aside, average direct cost (excluding premiums) was $655 in 1995, compared with $560 in 1994. As with the broker/wholesale channel, the average loan balance was higher than the retail channel's. In 1995, the cost to originate, excluding that of acquiring the loan from the correspondent, was 51 basis points. The most significant component of origination was account executive compensation.

To assess the feasibility of strategic business plans, an economic analysis performed at product level can be helpful. This analysis would encompass the channel and product type of various loans and their related servicing values.

These data could provide management with the information necessary to price loan products more accurately. Simply increasing production volume will not necessarily raise profits unless cost/profit ratios become more variable - which is often not the case. Companies that continue to increase their income-statement losses while growing production volumes may not recover these losses through servicing loans. This may be the next surprise for a volatile industry.

Mr. Oliver is a partner and co-director of KPMG Peat Marwick's mortgage and structured finance group, based in Washington. Ms. McDonald is a senior manager there.

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