2002: peerless performance.

Author:Simmons, Linda C.
Position:Cover Report: Business Outlook - A look at the mortgage business - Industry Overview

Where was the money made last year in the mortgage business? How did servicing hold up to the constant churning of loans? The Mortgage Bankers Association of America/STRATMOR Peer Group Survey found lots of answers. Big money was made in warehousing net interest spreads and the direct-marketing channel continued to outperform retail, broker and correspondent.

STANDING ON THE SIDELINES DURING this ongoing refinance tsunami, one can nod knowingly that this is the best it's ever been in the mortgage industry.

Production is humming along on all cylinders through multiple channels, churning out a wide array of product. Warehousing operations are reaping the benefit of favorable short-term borrowing costs. Secondary marketing is coordinating more volume in a month than previously seen in quarters. And servicing, despite heretofore unimagined amortization and impairment adjustments, has not missed an operational beat despite the high velocity of loans flying in and out of the portfolio.

Just how good is the "best it's ever been?" Really good.

Some major findings from the June 30, 2002, semiannual Mortgage Bankers Association of America (MBA)/STRAT-MOR Peer Group Survey and Roundtables (PGR) shed some light on how good things really were last year.

Highlights from the PGR findings include the following:

* The broker channel edged out the retail channel for most production volume. For megalenders, the difference in pretax production margin between the retail and the broker channels narrowed to 5 basis points.

* The direct marketing channel continued to outperform the retail, broker and correspondent channels, doubling the retail margin for megalenders and rivaling that for small-to-large lenders.

* The peer group averaging $5 billion in annualized total production earned 87 basis points on retail production--the highest of any peer group for that channel.

* Many small, midsized and large lenders maintained surprisingly strong focus on the purchase market through various means, including joint ventures, strategic alliances and purchase-oriented strategies.

* Warehousing net interest spread contributed at least 50 percent of the net pretax production margin in most channels and in most peer groups.

* Bank-owned and bank-affiliated mortgage entities benefited from bank referrals in terms of both production volume and contribution to the bottom line.

* While production volume doubled in 2001 over 2000, increases in head count were a mere 9 percent in 2001. However, the first half of 2002 produced a 25 percent increase in production staffing and a 50 percent increase in corporate administration.

* Loan officer, account executive and fulfillment productivity slipped in 2002, as mortgage companies ramped up hiring in 2001 and 2002.

* For some peer groups, direct-servicing costs per loan rose slightly over 2001, despite the unrelenting forces of churning (new loan setups and payoffs).

* Servicing operational costs of escrow functions and investor reporting, both greatly affected by churning and default, remained relatively flat over the past five years.


Fifty-eight prime and subprime companies participated in the MBA/STRATMOR Peer Group Surveys for the June 30, 2002, cycle. The various peer groups included:

* Group M: Megalenders/servicers (13 companies)

* Group A: Large lenders/servicers (15 companies)

* Group C: Small/Medium lenders/servicers (15 companies)

* Group S: Subprime lenders/servicers (15 companies)

The major characteristics of these peer groups are found in Figure 1. Note that companies in Groups M, A and C make up the prime survey sample, which is used for the purposes of this article. Companies in Group S make up the subprime survey sample, which is rapidly growing in number since its inception in 2001 and will likely expand into two peer groups in the future.


AVERAGE VOLUME AND BALANCES. Among PGR participants, 2002 production volume reached close to $20 billion on an annualized basis for the average firm in the PGR sample. This closely mirrored 2001 volume and was double 2000 volume.

At the same time, average origination loan balances continued to grow from 2000 to 2002. In 2000, the average loan balance was $135,010 and grew 22 percent to $164,475 in 2002. The largest loan balances of any peer group and channel in 2002 were sourced through the Group M broker channel, reiterating the ability of certain megalenders, especially the bank and thrift portfolio lenders, to absorb jumbo and niche products even in the midst of a refinance boom.


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