Many business strategies can affect profitability.

Effective companies balance production and servicing while making the tough decisions on secondary market pricing. These decisions involve taking appropriate risks and holding the line on pricing despite continuing pressures from the production people.

Balance includes not making every loan, selling loans that carry the greatest servicing risk with the servicing released, and not creating a nightmare with hundreds of private investors and loan types to service.

Effective companies may also measure their customers' performance and build a price difference into their relationships instead of pricing all loan types the same or only doing volume pricing. Such companies review fee revenue opportunities as much as they analyze cost savings.

Fees are often compared in market studies that don't compare similar loans relative to quality, credit, size, and overall servicing value.

The area of greatest opportunity is comparing the secondary market results after all cash gains, especially if a company is in a market that subsidizes price to the consumer.

The best performers may take additional risk, but they do not usually lose the subsidy amount. The cash result in the secondary market is better than expected because of better delivery.

Companies will hurt their long-term profits if they focus on volume growth and not profitability, notwithstanding what the key profit drivers other than volume happen to be.

Companies that are influenced by loan officers who indicate the need for close-by processing and underwriting will not be able to compete in the long term against highly effective, centralized, low-cost originators. Examples of centralization with a negative spin have fueled this fire, however, and companies and technology are now coming together to make the system work for them.

These are just some of the strategies that do and do not work long term. Those that don't work will likely result in lower profitability, especially when volume turns down over an extended period.

Existing in the mortgage banking business are cultural issues and management attitudes that may be obstacles to profitability:

*The loan officer is king and will always be the most significant component of the sales effort.

*Technology is for the bleeding edge only - we'll wait until it becomes a common practice.

*This is a banking business. It's mature and unchanging, therefore we'll apply some standard cost-cutting processes that will slash and burn 35% of the costs while we try to grow our servicing portfolio by 20%.

*Our bank or loan servicing customers will walk in our doors when they want to refinance because we have serviced their loan with a high degree of customer service.

*The direct-to-the-consumer strategy will never work because our customers would rather have face-to-face time with a loan representative than pay a lower price on our loan products.

These issues or attitudes are all too common in the mortgage banking business.

In this ever-changing consumer world, the need for companies to not let their culture and attitude affect their business strategies is critical.

Change is happening and will continue - the best performer will continue to change with its best customers, profitably.

Income from cross-sales will probably grow in importance but won't necessarily become the mainstay of the business. If a bank parent is too small or does not offer many consumer services, such as credit cards, home equity loans, other consumer loans, investment alternatives to CDs and basic deposit accounts, and trust services, then there is less value in the mortgage cross-sale.

Cross-selling products in most servicing operations will be difficult because most borrowers and servicers do not have a positive relationship; the only time borrowers talk with servicers is either upon a servicer error or upon collection notice.

Servicers have to provide a broader array of positive contact for the relationship to become more conducive to cross-sales.

Based on KPMG's mortgage performance studies and other industry surveys, it is clear that there are many ways to measure the results of a mortgage operation.

The key question is whether the right expectations have been set for the mortgage operation given its channels of business, the strategies being executed, the culture, the depth and quality of the mortgage management team, and the ability to analyze real performance.

What will differentiate the most profitable companies from others is speed to the origination market, speed in the sale of the asset, and speed in the responsiveness to servicing customer needs.

A company can't be expected to be a highly competitive and profitable entity without achieving and balancing the above formula.

Competition alone can often make a company take actions guided by market pressure, not a sound business strategy.

Mr. Oliver is partner in charge of the mortgage and structured finance group at KPMG Peat Marwick in Washington.

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