In 2000, the weighted average return dropped to 15.8% from 19.1% in 1999. Overall profitability was down because of a dramatic dip in loan production volume during the first quarter of 2000, while the production end, which includes including warehousing and secondary marketing operations, showed a mild recovery during the second half of the year, but not enough to make up the difference.
Experts attributed the profit drop to a trend that started in 1998, which was a record year for the industry. To handle production then, companies added resources that were still in place the following years, when there was less production, says Marina Walsh, a financial analyst with the MBA.
"A lot of companies examined themselves and implemented new management techniques to keep costs down," she says. "As a consequence, if they have a better handle on costs, it should produce a favorable first half (this year)."
James Cameron, a partner with the Stratmor Group, says many firms report they are managing costs more effectively now than during the 1998 production boom. He also says companies should start realizing savings from technology improvements they made in 1999 and 2000.
"These improvements, combined with larger servicing portfolios, should begin to drive down servicing costs at some point. However, with consolidation continuing, many of the mega-servicers have been in a 'perpetual conversion' mode, which tends to put pressure on servicing costs despite the technology improvements and scale advantages," he says.
According to the roundtable, only "mega-lenders" posted positive profit margins last year. Pre-tax production margins dropped to 6 basis points--or .06% of the principal balance of loans produced--2000 from 25 basis points in 1999. The retail production sector was especially hard hit, with profit margins dropping to--3 basis points in 2000 from 15 basis points in 1999. That equals a pre-tax net loss of $37 per loan in 2000 compared with net income of $189 per loan in 1999.
On the servicing side, net income rose to $309 per loan in 2000 from $285 per loan in 1999. Direct costs, however, remained static, at about $65 per loan. The ratio of new loans set up to the average servicing portfolio count dropped to 14.7% in 2000 from 20.9% in 1999. The ratio of payoffs to the average servicing portfolio count dropped to 10% in 2000 from 16.3% in 1999, according to the group.
The survey is designed to give mortgage companies a chance to see how they're doing in relation to the rest of the industry, offer information to help companies quickly respond to changes impacting the industry and analyze the factors driving their companies' performances. The companies that participated in the most recent survey represented more than 30% of the mortgage lending market, according to the MBA.
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