Mortgage banks were more profitable in 1995 than the year before, a survey says.

But the rebound mostly reflected last year's favorable interest rates, rather than fundamental improvements in profitability, said David Lereah, chief economist at the Mortgage Bankers Association.

The trade group's findings are based on a survey of 309 mortgage banks.

The average profit margin at mortgage banks in 1995 was 8.8%, up from 4.6% in 1994, the survey found. Most of the gain can be traced to higher prices lenders got for their loans on the secondary market as mortgage rates fell through most of 1995, Mr. Lereah said. Rising rates cut into loan prices in 1994.

Excluding gains from the sale of servicing, margins were only 4.5% in 1995. In 1994, that number was minus-4%.

Mortgage bankers remained too dependent on profits from loan and servicing sales in 1995, Mr. Lereah said. Profit margins excluding servicing gains need to at least double to levels that prevailed in the early 1990s before mortgage banks bulked up for the refinance boom, he said.

"Companies are still working through excess capacity. Not all is rosy," Mr. Lereah said.

The average mortgage bank earned $3.3 million from loan sales in 1995, compared with $748,000 the year before. They earned an average of $439 on each loan sold in 1995, up from $79 in 1994.

Servicing remained the largest source of net revenue, but a 15% increase in servicing expenses bit into servicing income. Mortgage banks earned an average of $99 for every loan they serviced in 1995, down from $109 in 1994.

Lenders continued to lose money on loan production. The average net loss per loan originated in 1995 was $1,030, compared to $919 in 1994. The uptick reflects lower loan volume in 1995; so lenders had fewer loans over which to spread costs. Loan origination expenses actually fell, 8.6% in 1995, the survey found.

Finally, lenders became more productive in servicing loans in 1995. Each employee serviced an average of 732 loans in 1995, up from 692 in 1994.

Surprisingly, the survey found that the largest servicers are not the most efficient. Servicers with portfolios between $4 billion to $19.9 billion processed monthly mortgage payments cheapest - they spent an average of $89 to service each loan against $114 at the largest servicers.

The most profitable companies were those with even smaller servicing portfolios. Lenders with servicing portfolios that ranged from $1 billion to $3.99 billion had a 16.7% profit margin on their overall business. At the largest servicers, the margin was only 5.2% - lower than for any other group.

Mr. Lereah said high spending on consolidation and new technology depressed profitability at the largest lenders, but he expects that their superior economies of scale will ultimately prevail.

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