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Loan Administration for the New Century

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					Loan Administration for the New
Century

presentation at
The Servicing Management Workshop
Questions to Administer Loans By



 Will only the big live long?

 What’s up with cost economies?

 Is there really revenue other than servicing and late
  fees?

 Will borrowers cause mortgage bankers any problems?
In considering those questions
we will cover...



 Company/Servicing Profits

 Costs

 Revenues

 Demographic factors
…by using data from...



 The Cost Study

 The Cost of Servicing Study

 MBA/Stratmor Peer Group Roundtables

 IT Cost Study (this is pro forma)
…and concluding that...

 Only the “mid” die young

 Direct cost economies are achieved at a fairly low
  number of loans serviced

 Yes, even you can earn ancillary income

 Probably, by being delinquent more than you’d like and
  not cross buying as much as you’d like
MBA Research Department Data
Tools



                                     Research Dept. Priorities

                               Performance Benchmarks                       Market Data

         Industry Aggregates                                       Company Level Analysis

Performance Report      Cost Study         Production Strategic       Servicing Strategic    Technology Strategic
                                                   PGR                       PGR                  IT Cost Study



                                          Production Operational     Servicing Operational
                                               COPS (planned)                COSS
Question 1: Will only the big live long?
(total company)




 Percent     30        26.1                                                       PM    NOI

             25
                                         19.4           21.1
             20                   17.3                      17.7
                                                14.2
             15
                                                                   9.4 9.1
             10
               5
               0
                          <1             1 to 4        4 to 20     >20
                                                                         $ billion serviced
     The Cost Study - 1998 data
Question 1: Will only the big live long?
(servicing only)



   Percent        70
                             58.6
                  60
                  50
                                               38.9
                  40
                  30                                          23.7
                                       14.3           14.4                   10.5
                  20
                                                                                    9.7
                                                                     6.7
                  10
                    0
                                  <1          1 to 4         4 to 20          >20
                                                                                    $ billion serviced
                                              PM - Svcg         NOI - Svcg
     The Cost Study - 1998 data
 Performance Measures Backdrop


 Key Performance Measurement Problems
   Book equity is frequently unrealistic --- returns are
    therefore distorted
   GAAP profits do not reflect the capital risks involved
    and market return expectations

 Possible Alternatives
   Base returns on an Adjusted Equity measure
   Evaluate performance based on Mortgage Banking
    Return on Capital (“MBROC”)
PGR Servicing Equity


 Equity = Avg Portfolio Balance x Avg Servicing
            Value x Equity Ratio

where:
  Avg Portfolio Balance = actual average portfolio
                               balance

   Avg Servicing Value = actual portfolio value

   Equity Ratio           = 33.3% (assumes 2:1
                                 leverage)
Weighted Average Return on
Required Equity

                                 78.9
  Percent                                                                    Production
                                                                             Servicing
                                                      54.3
                                                                             Total


                                               33.6

                                                                      19.9
                                                               13.1
                                         8.1



                                        1998                 1999
Source: Peer Group Roundtables
PGR Servicing RORE Comparison

Percent
                                    57.64
          60

          50

          40
                                                         26.62
          30              25.37
                 21.99

          20                                                        13.72
                                               8.25
          10

           0
               Group A   Group C   Group E   Group M   1999 Avg   1998 Avg
   COSS Sample Characteristics



 35 participants
 Annual data collection
 Operational analysis
 Coordinated data definitions with the PGR
 Full spectrum of companies by size
Selected COSS Contents

   Aggregate income statement
   17 direct cost center top line numbers aggregate to the 5 in the PGR
   27 direct expense categories within each cost center
   9 indirect expense items
   13 revenue items
   8 technology categories with specific software identification
   Company and weighted average payment system data
   Company and weighted average collection method data
   State-level geographic distribution of servicing volume
   Outsourcing data by share of function outsourced
   Investor Mix
Net Income per Loan Serviced


$/ln    101

                           80
                69


                                    42
                                            34




       <50    50-150   150-350   350-750   >750
                                           loans serviced (000)
Net Income per Loan Serviced

$/Ln                                     161




       101                        98




                 9



                         -2
       0     1.0-9.9   10-24.9   25-49   50>
                                               % government
Servicing Portfolio Dollar Volume


 $ bil.                                                     112.2
                                                                              1-4 Unit
                                                                              Other




                                               41.1

                                    17
          1.9          6.2
                                                      0.6           5.4
                 0.1         0.8         0.6


           <50         50-150      150-350     350-750       >750

                                                                    loans serviced (000)
Adjustments To Income


 $/ln                      69




                 17
          5
                                    -9      -22




        <50   50-150   150-350   350-750   >750

                                             loans serviced (000)
Net Operating Income


 $/ln    96



                                             57
                 51                 51



                          10


        <50   50-150   150-350   350-750   >750

                                           loans serviced (000)
Net Operating Income

$/ln                             108     107



        68




                        10
                4


       0%    1-10%   10-25%   25-50%   50%>

                                       % gov't loans svcd.
UPB Hedged



Percent                                            76
          80
          70
          60
          50                               39
          40                     28
          30
          20            9
                 0
          10
           0
               <50   50-150   150-350   350-750   >750
                                                  loans serviced (000)
Servicing Portfolio Investor Mix
(Full Sample)

                                   GSEs
                                   Ginnie
                                   Private
                8                  Affil.
            8                      Other

   9




                                    52


       23
Investor Mix (< 50k serviced)


                                GSEs
                                Ginnie
                                Private
                          42    Affil.
          21
                                Other




     28
                  2   7
Investor Mix (50-150k serviced)


                                    GSEs
                                    Ginnie
                                    Private
                          28        Affil.
                                    Other
     32




          8                    14
                18
Investor Mix (150-350k serviced)


                               GSEs
                               Ginnie
                               Private
               4        53     Affil.
         11
                               Other
     4




    28
Investor Mix (350-750k serviced)


                               GSEs
                               Ginnie
                               Private
                 9      51     Affil.
                               Other
       13




   6



            21
Investor Mix (750k or > serviced)


                                GSEs
                                Ginnie
                                Private
              4   4             Affil.
                          56
         11                     Other




    25
Question 2: What’s up with cost
economies?


 Direct vs total

 Outsourcing

 Productivity

 Technology

 Other
Direct Cost per Loan Serviced



   $/ln           110
           94
                                       86
                            74
                                               67




          <50   50-150   150-350   350-750   >750

                                               loans serviced (000)
Indirect Cost per Loan Serviced



   $/ln                                       355
                                     331
                            277
                  231




           69




          <50   50-150   150-350   350-750   >750

                                               loans serviced (000)
Cost per Loan Serviced

                             Direct               Indirect          Total

$/Ln
       500
                                                                   416            422

       400                                             351                  355
                                      341                    331
                                                 277
       300                    231
                       163
       200
             94              110
                  69                        74               86          67
       100

         0
              <50             50-150        150-350          350-750        >750

                                                                            loans serviced (000)
Direct Cost: Escrow Administration,
Taxes, and Insurance (5 column)


          13.64
  $/ln



                    7.8       7.43
                                        6.46
                                                5.31




         <50      50-150   150-350   350-750   >750
                                               loans serviced (000)
  EATI Productivity

loans/fte                                 9,382
                                                  8,642


                                6,392

                      4,611
            3,971




            <50     50-150    150-350   350-750   >750


                                                  loans serviced (000)
EATI Salary


 $000/fte    33.5                          32.8
                      31.3
                                 26                     26.2




            <50k    50-150K   150-350k   350-750k     750k>

                                                    loans serviced (000)
Outsourcing: EATI

Percent                                           38
                                       33


                             25
                   22




            4



          <50   50-150   150-350   350-750    >750
                                             loans serviced (000)
Servicing Productivity



loans/fte

                                        1,040    972
                              911
             714     663




            <50    50-150   150-350   350-750   >750
                                                  loans serviced (000)
Technology Cost


 $/ln                 EDP
                      EDP Depreciation
                      Communications
               3.67




                              7.85
        0.35
EDP Cost By Servicing Department


  $/ln                               Customer Service
                                     EATI
                0.45                 Investor Relations
                       0.31   0.21   Default
                                     Other (incl. Systems)
         6.25


                                            0.63
Communications Cost By Servicing
Department


$/ln                     Customer Service
                         EATI
                         Investor Relations
           0.51          Default
                         Other

   1.14


                                1.73




           0.13   0.16
Systems Cost Distribution


  $/loan                                  Personnel
                                          EDP
                          0.93            Occ/Depr/Equip
            0.23   0.27                   Other

     3.53




                                 Note: avg. of 9.37 fte’s
Systems Cost per Loan Serviced

 $/loan
                   8.94
                                       8.61


                             6.25



                                                2.63
           2.18




          <50k    50-150   150-350   350-750   >750k

                                                  loans serviced (000)
Direct Default Cost per Loan
Serviced (5 column)

                  30.63
$/ln
                                      27.53


                            19.39               20.56


       15.63




           <50   50-150   150-350   350-750    >750
                                              loans serviced (000)
Direct Default Cost per Loan Serviced


 $/ln                                 24.05
                           21.51                22.37




                 14.78
        12.33




        <2%     2-3.5%   3.5-4.5%   4.5-5.5%   5.5%>
                                                        % delinquent
Payment System (Full Sample)


% of loans

                  4
                         24




                              Coupons
             72               Monthly Billing
                              Other
Payment System (<50k serviced)


% of loans                 Coupons
                           Monthly Billing
             4             Other


 27




                           70
Payment System (750k> serviced)


% of loans                 Coupons
                           Monthly Billing
             5             Other
                      5




                 91
Question 3: Is there really revenue
other than servicing and late fees?

  Total revenue

  Servicing fees

  Subservicing

  Late fees

  Ancillary income

  Escrow
Total Revenue per Loan Serviced


                                     468     479
 $/ln
                 392
                           361

         259




        <50    50-150   150-350   350-750   >750
                                            loans serviced (000)
Average Loan Size Serviced

 $000
                                       93.2       96
         90.2               85.6
                  76.6




        <50k    50-150k   150-350k   350-750k   750k>

                                                loans serviced (000)
Servicing Fees per Loan Serviced


$/ln                                         423
                                   375
                335
                         303
        217




       <50    50-150   150-350   350-750   >750

                                           loans serviced (000)
Subservicing Fees per Loan
Subserviced

 $/Ln

        106                                                                For
                  88                                                       By
                                                80

                                       56
                                 48
                       41
                                                       32


              0              3              0

        <50       50-150    150-350   350-750   750>

                                                            Loans serviced (000)
Average Loan Size


 $000


                100.6
                          91      94.8
                                                81
        72.8




        0%     1-10%    10-25%   25-50%      50%>

                                          share of government loans
Late Fees

$/ln
                               29.3              29.4
                                         27.8
       30              24
       25    20.4
       20
       15
       10
        5
        0
            <50     50-150   150-350   350-750   >750


                                                  loans serviced (000)
Ancillary Income

$/ln

                    24
       25
       20
       15                                        11.4
                              8.3
       10     5                         5.6
        5
        0
            <50   50-150   150-350   350-750   >750


                                               loans serviced (000)
Total Revenue and Cost per Loan
Serviced

$/ln

                                                   468         479
       500                                                           422
                                                         417
                         392
       400                     341    361 351

             259
       300
                   163
       200

       100

         0
             <50         50-150       150-350      350-750     >750

                                  Revenue   Cost
Question 4: Will borrowers cause
mortgage bankers any problems?



 Delinquencies in a recession (cost and fair lending)

 Cross selling (regular and low income)

 Privacy

 Sub-prime
 All Loans Past Due
 As A Percent of 1-4 Family Loans Serviced

 Seasonally Adjusted, (%)
  6.50

  6.00

  5.50

  5.00                                 1980-89 = 5.29
                                                                         1990-99 = 4.37
  4.50

  4.00           1972-79 = 4.35
                                                                                        1999:Q4
  3.50                                                                                    3.93

  3.00
         72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0


Source: MBA National Delinquency Survey
Delinquencies

  COSS delinquency rate averaged about $22 per loan
   at an average delinquency rate about half of the
   1984 peak of 6.31%.
  There do not appear to be economies of scale in
   default management.
  There are sub-prime loans newly entered into
   servicing portfolios.
  Credit scored and high LTV loans have not been
   stress tested.
  Sub-prime and first timer mortgages are heavily
   weighted toward minorities.
Cross Selling to Doug

 Credit Union checking
 Credit Union savings
 Credit Union auto loan
 401k through MBA
 Insurance through independent agent
 Direct purchase of stock
 No load mutual fund direct purchase
 Wachovia Visa
 HomeSide services mortgage (no second or HEL)
 College payments in cash
Cross Selling to Low Income


  All   families vs LI credit cards - 66%-45%
  All   families vs LI mortgages - 39%-19%
  All   families vs LI auto loan - 31%-19%
  All   families vs LI education loan - 12%-11%
  All   families vs LI CD - 14%-13%
  All   families vs LI IRA - 26%-12%
  All   families vs LI life Ins. - 72%-55%
  All   vs LI ATM, phone, computer - 51%-36%
Privacy


Legislation isn’t done

Consumers may sell their personal information

Who owns the info anyway?

Expect the trial lawyers to get involved
Sub-Prime



 State-by-state “predatory lending” legislation could
  increase costs substantially for national lenders

 Performance in a recessionary environment will be a
  new experience

 Agency entrance will reduce profitability
…and concluding that...

 Only the “mid” die young.

 Direct cost economies are achieved at a fairly low
  number of loans serviced.

 Yes, even you can earn ancillary income.

 Probably, by being delinquent more than you’d like and
  not cross buying as much as you’d like.