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Seeking better industry data.

Most mortgage bankers will tell you they perform some cost accounting. And many can quote their cost of servicing. But usually what they are referring to as their average cost of servicing comes from taking their total servicing expenses divided by the average loan count in their servicing portfolio. They can then go on to tell you that their unit costs are less than the industry average.

But if you start comparing one company's unit costs to another, all variances are dismissed because it is impossible to compare apples to oranges. What they are saying is that each portfolio is unique because each one contains different blends of loan types, geographic locations, investors and other factors. Hence, if portfolios are different, you can't really compare them.

On the one hand, mortgage bankers want to compare their average costs to industry average costs when it is to their advantage. Yet, they do not want to compare average costs between companies (especially if it is not to their advantage).

This inconsistent behavior obscures the real problem--average costs. For some time now, management accountants have known that average costs are misleading, especially at the product or portfolio level, which is what we are referring to here.

Activity-based costing (ABC) is the preferred method of cost measurement today. Not only does ABC provide more accurate product unit costs, but the activity unit costs that go into the creation of those products can also be detailed. It is at the activity and product unit cost level that mortgage bankers should be comparing their cost statistics because every mortgage banker performs similar basic activities associated with certain basic products.

For example, every mortgage banker has to perform the same activities to service GNMA loans. These activities include collecting payments, remittance, reporting and delinquency handling. The exact processes are spelled out in the GNMA servicing manual that every mortgage banker must follow to maintain active status with GNMA.

How each mortgage banker performs these activities can and probably does differ, which is how we can get activity unit cost variances between companies. But now we are at least comparing unit costs for specific products. This is what the Mortgage Bankers Association of America (MBA) should be striving for when it is trying to get cooperation and statistics for the mortgage industry--statistics that are more usable.

My recommendation to the industry is to "wake up" to the realities of cost management, adopt an ABC approach and define a standard set of activities and products for the industry to monitor.

The biggest roadblock to accomplishing this rests with the mortgage bankers themselves; most mortgage bankers do not rack unit costs at the activity level. ABC has not reached the mortgage industry to any measurable degree as yet. In fact, most service industries (non-manufacturing) have been slow to adopt any cost accounting standards. One exception is banking.

The National Association of Bank Cost and Management Accounting (NABCA) has been operating for many years to help banking and other financial institutions with their cost accounting needs by sponsoring educational seminars and conferences. NABCA also publishes a monthly bulletin and a quarterly journal that provides a forum for articles detailing various cost accounting matters. A recent article in the Journal of Bank Cost and Management Accounting was titled "Applying Activity-Based Costing to the Mortgage Banking Industry." This is a "must" read for any mortgage banking firm that is truly interested in measuring and improving unit costs. There are also many relevant articles in the Management Accounting magazine published monthly by the Institute of Management Accountants.

Currently, MBA's cost studies could be made more useful to mortgage banking managers. Furthermore, the Mortgage Servicing Performance Study, conducted annually by KPMG Peat Marwick, is not activity-based and, in my opinion, is statistically flawed. The other major industry cost performance study is known as the MBA cost study and is produced annually by MBA's economics department and derived from data contained in the Mortgage Bankers Financial Reporting Form (MBFRF).

This form is the result of a data collection partnership made up of Fannie Mae, Freddie Mac, GNMA and MBA. This information is not activity-based either and is at a level that is too high to have operational impact. In other words, it can only serve as an overview of general trends.

What is necessary is a set of standard activities and products that all MBA members can use to monitor their own costs. In addition, they would be able to compare their costs to the industry without the uncertainty of portfolio differences. I challenge the participants of MBA's Financial Management Conference to make this a priority this year. A financial reporting form working group is now working with the MBFRF statistics to determine how they can be improved. I would recommend that this group simultaneously address the ABC issue because there is some overlap. The expertise of the MBA economists could also be tapped.

If this objective is met, companies that use ABC to measure and improve their costs will receive the following benefits:

* Accurate means to compare cost data and industry averages;

* Consistency in cost management;

* Accurate product costs that can provide input to pricing decisions and calculations of profit margins;

* Accurate means to measure change.

These benefits would greatly enhance the ability of mortgage banking firms to control costs.

Sam Isaac is president of Automation Consulting, Brighton, Michigan.
COPYRIGHT 1993 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Isaac, Sam
Publication:Mortgage Banking
Article Type:Column
Date:Jun 1, 1993
Words:894
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