Peat Marwick's national survey of 25 servicers showed that their costs went up, and productivity and profitability went down in 1993 as the industry coped with the flood of mortgage refinancings.
Regina J. Reed, senior manager in the national mortgage finance group at Peat Marwick's Washington offices, discussed the survey's major findings with the American Banker.
Q.: Could you start off by telling me more about whom you surveyed?
REED: We split servicers into two groups: major-market servicers, those servicing over 100,000 loans, and middle-market servicers, those servicing less.
The minimum number of loans [required] to participate in our study is 15,000.
Our whole concept is through an apples-to-apples comparison to provide some standard for cost and productivity.
Q.: What were your major findings?
REED: In 1993 -- and this shouldn't surprise most people -- costs per loan went up.
They went up because people had runoffs at very high levels. Up to 30% [of the portfolio being paid off] was not unusual at all.
So if you've got one loan rolling off, and you have to put another loan on just to count as one loan during the course of the year, obviously your cost to service that average one loan is going to go up.
Q.: What did you find on the productivity and profitability fronts?
REED: We generally [found productivity was] an average of 600 loans per full-time equivalent [employee].
We measure productivity a little differently than other people. Our concept of productivity is very fully loaded.
If your entire mortgage company were to be separated out into servicing and production, all of your people, including overhead, executive office, mailroom, etc., would be accounted for in servicing or production.
Q.: How does productivity compare with years past? What's the trend?
REED: It's a decrease.
Q.: How about profitability?
REED: People were definitely getting more creative and more aggressive in getting ancillary income per loan.
For example, with this payoff volume, if the payoff statement needed to be faxed, there would be a fax fee, and that could easily run $20.
Q.: Could we get into some specific numbers on the cost of servicing loans?
REED: We break out cost into four functions: customer service, investor service, risk management, and miscellaneous functions.
Customer service costs were $30 per loan on average.
Investor service costs hover a little short of $15 per loan.
Risk management, which is generally driven by delinquency rate and the percentage of recourse loans in the portfolio, ranges from less than $15 on average to $25 per loan.
Miscellaneous functions range from $2 or $3 a loan to $7 or $8 a loan. That depends on volume, as well as the amount of automation between your front-end system and the servicing system.
Q.: So what was the average cost of servicing a loan in 19937
REED: For middle-market servicers, it was about $66 a loan. They generally had lower risk management costs.
Major-market servicers had high delinquency rates as well as some recourse loans from the 1980s that really drove up their risk management costs.
Their costs hovered more around $70 or $71 per loan.
Q.: I would have thought it would be the other way around, that larger servicers would have lower costs.
REED: The next question is, do economies of scale exist?
Our answer is, yes, they do exist in certain areas within servicing.
There generally are economies of scale in the investor reporting area as well as customer service.
Q.: Will the trend toward consolidation in the industry have an impact on these numbers in 1994?
REED: I think it's basically pointed to the fact that everybody believes that economies of scale are feasible and expected in mortgage servicing.