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Economic trends.


Although many would like to, few mortgage bankers can forget 1987, the industry's worst year in recent history. From the soaring profit margins of 1986, profits plunged to barely above zero in 1987 in the wake of declining origination volume and higher interest rates. Since then the industry has been working hard to contain costs and improve profitability. Recent evidence suggests that maybe, just maybe, the industry has turned the corner.

The evidence is the performance in the third quarter of 1989 of the 11 firms that responded to MBA's Ratio Analysis Survey (RAS) for this quarter and the third quarter of 1988. On average, between the third quarters of 1988 and 1989, these 11 firms increased productivity in origination and servicing, contained costs in these areas and improved overall profitability.

With the largest cost component of a mortgage banker's operation, personnel expenses, continuing to increase over the period (see accompanying Table), the firms in the sample continued their efforts to combat these rising costs by scaling down or consolidating their operations and, in some cases, changing their overall focus from predominantly retail to wholesale lending. Between the third quarter of 1988 and the third quarter of 1989, staffs at these 11 firms were cut by an average of eight employees per firm. The largest declines were in the origination function where the number of origination employees was slashed by an average of 35 employees per firm. Servicing staffs were also reduced, falling by an average of five employees per firm. However, firms in the sample partially offset these cutbacks in origination and servicing personnel by increasing their staffs in other areas of their operations, possibly in wholesale and correspondent lending functions.

In addition to reducing staff, firms have been integrating new technologies into their operations. This is particularly evident in the servicing function where firms have increased their use of computer applications for collections and quality control. The result has been a substantial increase in productivity and a concomitant decline in servicing costs. Between the third quarters of 1988 and 1989, the number of loans serviced per servicing employee rose 12 percent, or 86 loans, to 789. In turn, direct servicing costs per single-family loan serviced declined 16 percent over the course of the year to an annualized rate of $60.52. Data processing costs associated with servicing also fell over the course of the year, dropping 17 percent per loan serviced to an annualized rate of $9.04 in the third quarter of 1989.

Origination productivity also significantly increased over the period. The decline in origination staff, combined with a nearly 10 percent increase in the number of single-family loans closed, resulted in a 36 percent jump in the number of single-family loans closed per origination employee to 38 loans. Surprisingly, despite this significant jump in origination productivity, the direct origination cost per single-family loan closed was essentially unchanged from the previous year, averaging $1,469 in the third quarter of 1989. Because personnel expenses account for roughly two-thirds of direct origination costs, this suggests that employment costs per origination employee rose quite a bit faster than did employment costs per all employees.

Despite the stickiness of origination costs, two key measures of profitability increased substantially over the year. Return on average equity rose 85.4 percent to an annual rate of 12.68 percent, and return on average assets increased by 69.2 percent to an annual rate of 1.76 percent. However, as we have seen several times in the past year, much of the increase was due to large sales of servicing. Nevertheless, even without servicing sales, the trend in profitability over the last year has been clearly upward.

Obviously, 11 firms do not constitute the entire mortgage banking industry. However, the performance of these firms is heartening. We expect to see further evidence such as this in the months ahead as the fundamentals for the current year seem to favor mortgage banking. After an uptick in rates early this year, we expect interest rates to decline somewhat this Spring, fostering a modest increase in originations. Moreover, servicing operations are unlikely to suffer from unfavorable economic developments as a slight increase in the unemployment rate will most likely be offset by further modest gains in home prices, boosting homeowners' equity.

Does this mean that the worst is over for mortgage bankers? Maybe, although at this point it is difficult to say with certainty. But things do look better than they did in 1987.

Data from the RAS is quite useful in tracking current developments in the mortgage banking industry. Additional member firms that would like to participate in the quarterly survey are welcome. Reporting is relatively easy, and the results are routinely distributed shortly after the end of each quarter via the ECHO system or in a typed report. For further information, contact Rick Murray, programmer/analyst, MBA economics department, at (202) 861-1941.
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Title Annotation:Ratio Analysis Survey
Author:Campbell, Michelle V.
Publication:Mortgage Banking
Article Type:column
Date:Mar 1, 1990
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