A pop quiz: Which residential mortgage servicer has the largest average loan size in its portfolio? It must be Bank of America Mortgage of Charlotte, NC, because it happens to be the largest servicer in the nation? Right?No? Then what about Chase Manhattan Mortgage or Wells Fargo Home Mortgage, or Countrywide? They rank two, three and four, respectively, in housing receivables (based on second quarter figures). Nope, nope and nope again.
The mortgage firm with the largest average loan size is none other than Bethesda, MD-based B.F. Saul Mortgage, a subsidiary of Chevy Chase Bank of Maryland.

At the end of the second half, the average size of a loan serviced by B.F. Saul was $142,350. The average size for BoA Mortgage was $99,876; for Chase, $100,314; Wells Fargo Home Mortgage, $110,146; and Countrywide, $98,476. This translates into rankings of 22nd, 19th, 10th, and 23rd, respectively.

Yes, when it comes to loan size serviced, B.F. Saul is kicking the butt of the big boys. But what does all this matter in the scheme of things? It all depends. There is a commonly held belief in the mortgage industry that for most "vanilla" loans the cost to service that mortgage--whether it's a $100,000 or $200,000 loan--is virtually the same.

Which loan yields more in the way of cash-flow, the life blood of the mortgage banker? It doesn't take a rocket scientist to tell you that a $200,000 loan yields more in the way of interest than a $100,000 loan.

Ah, but life isn't always that simple. Different loans carry different servicing "fees" and different risks. Vanilla 'A' paper conventional loans that typically get sold to Fannie Mae or Freddie Mac carry a 25 basis-point servicing fee. These loans have the lowest default rate out there and shouldn't cause much in the way of servicing snafus and therefore are cheaper to service.

But the Fannie/Freddie 25 basis-point servicing fee is almost half that of the 44 basis-point servicing fee on Federal Housing Administration and Veterans Administration-backed mortgages. So is it more profitable to service government-insured loans than conventional Fannie and Freddie loans?

Well, not always. FHA/VA loans have delinquency ratios north of 7% while Fannie and Freddie loans go sour at just 2% of outstandings. As any mortgage banker can tell you, the foreclosure process, or the cost of bringing a loan current, is not cheap, and it eats into profits.

Jerry Baker, president of First Horizon Home Loans, based in Irving, TX, is not sure how much of a difference loan types actually make in determining profitability. "Government loans cost more to service because of delinquencies but they carry a higher service fee," he says.

Similarly, "jumbo" mortgages, which are 'A' credit in quality but are higher than the Fannie/Freddie loan limit of $252,700, carry higher note rates which, in theory, makes the origination and servicing of these loans more profitable.

But jumbo loans tend to prepay faster during a refinancing boom than conventional or government product. Why? Because the "rich folks" who take out these jumbo loans tend to be savvy and know they can save a bundle on their mortgage payments.

The Origination Side
Not all mortgage lenders that fund loans hang onto the servicing rights. Some do, and some don't, and some sell the loans "servicing-released" into the secondary market.

It has been argued that the cost to originate a loan, like the servicing cost, is the same whether it's a $100,000 loan or $200,000 loan. After all, an appraisal isn't going to cost more, necessarily, because the house is located in a higher-priced neighborhood.

The lender with the highest average loan size originated in the first half of 2000 was Astoria Federal Savings and Loan of Lake Success, NY. Astoria's average loan size was $263,388, according to statistics compiled by U.S. Banker and Mortgagestats.com.

Chase Manhattan Mortgage, the nation's largest residential lender in the first half (in terms of dollar volume originated), had an average loan size originated of just $120,298, ranking 39th nationwide.

Wells Fargo, the nation's second largest originator in terms of volume, ranked 24th in loan size with $134,732. (The results might be skewed to some extent because two of the nation's largest lenders in terms of dollar volume, Countrywide Credit and Bank of America Mortgage, would not disclose the number of loans they originated. That figure is needed to calculate average loan size.)

Does Astoria have a better profit margin on its mortgage business than Wells and Chase because its average loan size is bigger? It's hard to tell because few firms break down net profits by function, and even those that do carry different costs against those profits. This makes "apples to apples" comparisons tough or impossible.

But here's another way to look at the numbers: If you think the largest residential originator in the first half, Chase Manhattan Mortgage, was the most profitable on a net earnings basis, think again. In the second quarter, among mortgage-related lender/servicers, Washington Mutual, the number five ranked lender/servicer, earned more than anyone else, $452 million. Golden West Financial, the parent of World Savings of Oakland, earned the second most, $133.3 million.

What did Chase Manhattan Mortgage, the Big Kahuna of mortgage banking, earn in the quarter? About $74 million. (Chase's parent is one of those nice banks that discloses earnings by business unit. No data was available on Bank of America Mortgage because the parent would not break it out.) As a lender, Golden West/World ranked 10th in the second quarter and 21st in servicing, but it still out-earned the much larger Wells, Chase and Countrywide, the latter of which earned $99.8 million.

Wells Fargo Home Mortgage, the second largest lender in the second quarter and the third largest servicer, earned $62 million, less than half of what Golden West/World earned and a fraction of what WaMu earned. So does size matter in the mortgage industry? When it comes to profits, size, it would appear, doesn't mean all that much, at least not yet.

This might strike some as surprising given all the current talk in the mortgage industry about how servicing, and to a lesser degree, lending, is becoming a scale business.

If it is indeed a "scale" business, that would mean the largest residential producer or servicer would earn the most because its mortgage factory, thanks to economies of scale, would have the lowest unit cost, no?

But so far, that's not how the profit picture is turning out. Wells Fargo and others are paying a ton of money to buy other mortgage firms and servicing rights.

When will these acquisitions pay off? Or is the questions better asked: Will they ever pay off?

A senior contributing editor to U.S. Banker, Paul Muolo is executive editor of National Mortgage News. He can be emailed at: paul.muolo@thomsonmedia.com

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