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Unusual times.

These are the times that launch servicing portfolios. There are certain moments in the industry's history that carry sufficient production power and profitability to allow smaller companies to create a servicing portfolio from scratch. They are rare windows of opportunity--and this one is gaping.

Small companies, usually forced to sell most everything servicing-released in normal markets, find in today's market that they can create a $100 million portfolio in a year's time. And what's more, it's low coupon servicing--paper gold for mortgage bankers.

We probed the industry for mortgage bankers with other stories to tell of what is going on with their companies in this year of historic volume.

Vicki Matthews, president of HomeSouth Mortgage Corporation, Atlanta, is one mortgage executive who has been blessed by good timing. Her company is harnessing today's production volume to fashion a brand-new servicing portfolio. HomeSouth got its seller/servicer approval from Fannie Mae in March 1992 and kept its first loan in July of that year. The company retains all of its conforming/conventional production and sells all its government and jumbo servicing.

The five-branch, strictly retail mortgage company serves the Atlanta metro area solely, and early this month, it boasted a $103 million servicing portfolio. Matthews says she had checked the day we spoke to her and out of the roughly 1,060 loans in the portfolio, no more than 15 had refinanced. She concedes that "we got into servicing at a good time."

These are very good times for the business in so many ways, but also very treacherous times for managers tempted to add permanent overhead that will prove unneeded and costly when the refis disappear. It is a time for being on your guard, if you are a mortgage banking executive. Because of this, we asked a sampling of managers to identify the internal operating statistic they are watching most closely to monitor the performance of their companies in current market conditions.

Matthews, the Atlanta-based lender whose focus is on builder business, said "the overall production number is very important to us. We monitor that most closely." HomeSouth is doing roughly $30 million a month in production. Matthews says her company monitors application volume to feel comfortable about future expansion. "We don't want to add new processors and closers if apps are dropping off."

The second most closely watched number for HomeSouth is the refinance share of closed loans. Matthews says the refi number is very important to watch for her company and she says loan officers are encouraged to heavily focus on their builder and Realtor customers instead of refis. Instilling that philosophy in the sales force has been successful. The refi share of total volume in August was only 20 percent and in September it was kept at 29 percent of closings. Matthews says "we feel very fortunate we're keeping those |Realtor/builder~ relationships up, so when the refis die down, we're not going to feel the pain that lenders doing 80 percent refis are going to feel."

We also asked the same executives for the one or two external market indicators they are watching most closely to signal how they stand in their markets or upcoming marketplace developments to anticipate. Matthews said the number-one market indicator her company watches is new home sales in Atlanta. A large portion of HomeSouth's business comes from builder business, and as Matthews says "in Atlanta, they are selling houses like hotcakes." The builder business has proved to be HomeSouth's "bread and butter" and Matthews says the Atlanta market has proven for the last 12 to 15 years to be "more recession-proof" than a lot of other markets. She says her company expects the Atlanta market's mortgage business to stay "pretty good for us through 1996." HomeSouth will probably move into wholesale sometime in 1994, says Matthews.

For all of 1993, HomeSouth expected to do roughly $250 million but they had met that target with September's closings. She says the strongest segments of the Atlanta purchase market are the first-time homebuyer and the relocation market. The reason the Atlanta builder business has been so strong, is because many builders are targeting their homes toward the first-time buyer, Matthews said. The relocation market is strong because many companies are relocating to Atlanta.

We managed to get twin perspectives from senior executives at Chemical Mortgage Company based in Worthington, Ohio, on what internal and external indicators they are monitoring most carefully in the current market. Steve Rotella, president of the mortgage company, says the internal number he's tracking most closely is "total loan volume" for his operation. And the external market indicator being monitored most carefully came from Kenneth Wohst, senior vice president for production with Chemical Mortgage. He says the number they watch is Chemical's national market share of total origination volume, as measured by calculating their share of weekly total application volume taken by all lenders. The Mortgage Bankers Association application volume index is helpful in tracking that share.

Rotella says the reason he closely watches his company's total loan volume number is because it "drives so many aspects of the business. It obviously drives secondary marketing activities and it drives our total expenses and our personnel needs on the front and back ends of the business. It's a critical number to monitor." We asked him what that particular figure was telling him right now. He said, "It's telling us we're real busy."

Rotella said there had been a little dip in overall loan volume around the time we interviewed him in early October, and Chemical executives had to determine whether it was an actual dip in volume in the overall market or if it was just affecting Chemical. But he added that one little dip doesn't mean much in a boom period like this. He said business continues to be "very, very strong and much more weighted toward refis than ever before. For the secondary marketing group, that requires more vigor in monitoring fallout and those kinds of developments." As for an external market indicator he closely watches, Rotella asked, "if interest rates count." We disallowed that answer for most respondents--it's too easy.

Wohst said Chemical is on its way to posting roughly $14 billion in total production by the end of this year--that's up from $12.4 billion in 1992. He said that roughly 50-55 percent of Chemical's production has been refinances so far this year. Rotella added that in September, it was about 56 percent, but other months, it has been lower than that. Rotella added that the refi share was "up a bit" from 1992. Wohst said that there was a "much smaller refi share" in Chemical's wholesale production--which it defines as closed loans purchased from other originators. He attributed that fact partly to the "fair amount of government loans" Chemical buys on the wholesale side. Wohst said the government share of Chemical's overall production was slightly higher than in 1992.

Chemical has roughly 40 branches throughout the country, Wohst said. He estimated that the mortgage company has kept its national market share about level with where it was last year. He says that overall production will be up about 10-15 percent for the entire industry and Chemical's production will be up by about that amount as well.

Wohst said the strongest purchase loan markets for Chemical have been the first-time buyer markets "probably in the Southeast," which he defined as Florida to North Carolina. His nominee for the weakest purchase market was California, where Chemical has only two branches--one in northern and one in Southern California. Wohst said that he'd "like to have more than two branches in California and if we were having this conversation the same time next year, we'd probably have greater representation in California."

Rotella declined to cite his runoff rate, simply saying it's better than the industry average and on an annualized basis, it's better than it was in 1992. But the servicing portfolio ended last year at $30 billion and was $37 billion at the end of September. They are headed for a $14 billion production year, so the very curious can try and figure it out.

J. Albert Smith, president of Banc One Mortgage, Indianapolis, said, "That's really crystal-ball gazing" when we asked him to estimate production volume for all of 1993. But nevertheless, he estimated his company would do $7.5 billion in total production this year. That's up from $5.2 billion in 1992. Part of the production boost comes from a key acquisition of Valley Mortgage Corporation, which took Banc One into two new states--Utah and Arizona. With the acquisition, the lender has 95 retail branches in 20 states.

Smith said that Banc One Mortgage started the year with a servicing portfolio of $11.5 billion and by early this month had grown the portfolio to $17.5 billion. The purchase of Valley Mortgage added a servicing portfolio of roughly $4 billion to Banc One's existing portfolio. Smith says that the runoff rate through the first nine months of this year is "up substantially" from 1992 over the same period. Through September 1993, the annualized runoff rate in Banc One's portfolio was running at 26 percent. He said that for the nine months ending in September, Banc One had taken in about $5 billion in originations and paid off about $3 billion in loans.

We asked Smith what internal operating statistic he was watching most carefully these days. He had two answers. First, was the company's refinance percentage of its overall loan volume. Second, was the "abandonment rates on our customer service lines." Abandonment rates represent the number of incoming calls where customers hang up before they can be helped. Banc One gets daily reports that break down the subject of all incoming calls and tracks the percentages of callers that give up before a customer service person can help them. Smith said that currently about 30 percent of the incoming calls are questions related to refinancing or payoffs. He says management monitors those numbers to make sure there is adequate staffing in the necessary business areas. He says if the abandonment rate shoots up to 8 percent, "that's a problem for us and it shows us we have to attack it."

As far as the refinance share of business, Smith said that roughly 65 percent of Banc One's pipeline is currently refinance loans. Pipeline is defined as everything from applications through funded loans in warehouse. Last year, 52 percent of its pipeline was refinances.

We asked for an external market indicator Banc One executives were watching most closely. Smith said, "the trend of interest rates and overall economic activity." We pressed for more specifics, and he said housing starts was one particular number they watch carefully. But Smith said because they are a national lender, there is really no regional economic data that they focus on.

His candidates for the strongest purchase loan markets were Colorado and Texas. He said Colorado had been "very strong" and Texas also was strong. Smith noted that Banc One hadn't found as much refi volume coming out of Texas as compared with the Midwest, for example.

Smith's nominee for the weakest purchase loan market was California.

Janet Reilley Hewitt Editor in Chief
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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Title Annotation:servicing portfolios in mortgage banking
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Date:Oct 1, 1993
Previous Article:Fine-tuning Price Waterhouse's model.
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