Magazine article Mortgage Banking

The Cost of Servicing in 2003: Total Direct Servicing Expenses Rose Last Year by 7.3 Percent for Servicers Participating in the Mortgage Bankers Association's Cost of Servicing Study. A Steady Onslaught of Prepayments Saw Net Financial Income from Servicing Decline for the Third Straight Year

Magazine article Mortgage Banking

The Cost of Servicing in 2003: Total Direct Servicing Expenses Rose Last Year by 7.3 Percent for Servicers Participating in the Mortgage Bankers Association's Cost of Servicing Study. A Steady Onslaught of Prepayments Saw Net Financial Income from Servicing Decline for the Third Straight Year

Article excerpt

AS THE INDUSTRY'S SERVICING ENGINES CONTINUED TO CHURN AT FULL STEAM FOR THE THIRD consecutive year, one might expect servicers to have mastered their game plans for these challenging business conditions. Surely the investments in technology, experience in balancing temporary and permanent employees, and tactical use of outsourcing should have paid off with increased profitability and productivity during these high-volume times. But the servicing picture in 2003 was mixed. * Helped by increases in ancillary fees and servicing fees based on higher loan balances, servicing net operating profit has continued to rise over the past few years, albeit at a slow rate. Total direct servicing costs per loan, however, also escalated, especially for personnel, customer service and servicing systems. And, for the third consecutive year, servicing net financial income declined as mortgage servicing rights (MSR) impairments and amortization outweighed hedging gains. * These are some of the key findings from the Mortgage Bankers Association's (MBA's) latest annual Cost of Servicing Study (COSS), now in its sixth year. * MBA conducts its benchmarking study and Servicing Operations

Forum annually in order to provide servicing managers with detailed information on costs, productivity and overall profitability. The COSS is designed to accommodate servicers of different sizes and peer group characteristics. Larger servicers can allocate costs to and see the corresponding results in 17 functional areas; smaller servicers, which often have fewer distinct departments, can opt to allocate expenses to six functional areas. As part of the study, participants are invited to the Servicing Operations Forum held in June to review aggregate results and to discuss servicing practices.

For purposes of comparing operational and financial data results, companies are organized into peer groups based on the number of loans serviced. Although we present most data based on the weighted average results from this grouping, the study gives participants an ability to understand further the factors that drive cost and performance by providing metrics from four additional peer grouping categories: percentage of government share serviced, ownership type, churn rates and delinquency rates. This article highlights outcomes from the 2004 MBA COSS and feedback from servicers at the Servicing Operations Forum.

In addition to key findings noted earlier, the COSS results also revealed the following:

* Small servicers in particular struggled to keep direct servicing costs contained, even though their servicing churn was lower than larger servicing peers.

* Productivity (loans serviced per servicing full-time equivalent [FTE]) dropped from 2002 to 2003, despite the use of outsourcing services to handle certain servicing functions.

* The largest servicers were hit hardest by negative amortization and impairments of servicing rights, and ended up with the lowest servicing financial profitability as a result.

* When it comes to metrics that relate to customer relationships, small servicers appeared to fare better than large operations, with better customer retention ratios, more cross-sell/ancillary products per servicing customer, a higher percentage of customers with multiple products and lower incoming call abandonment rates.

The COSS sample

The companies that comprised the 2003 data sample represent a broad cross-section of mortgage servicers with various portfolio sizes, geographic location, investor mix and operational practices. Together they serviced 25.4 million loans for a total mortgage debt outstanding of $3.1 trillion, representing approximately 48 percent of the total U.S. servicing market.

Reflecting industry consolidation and the addition of several large participants over the past five years, the average portfolio size of the firms in the COSS sample grew to 818, 249 loans in 2003 from 380,671 in 1999. …

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