Rising Rates Putting Focus on Servicing.

With loan origination volume expected to decline, many lenders are expecting their mortgage servicing operations to drive profits over the next two years.

And that is putting more focus on the factors that drive loan servicing revenue and costs, according to consultants at Pricewaterhouse-Coopers mortgage banking group.

Consultants Martin Touhey and Steve Davies of PwC outlined their concerns in a recent article in the company's consumer finance journal, arguing that lenders need to balance cost management with delivery of customer value and loan quality.

"In a rising interest rate environment, the value generated by the servicing asset tends to increase and the value generated by the production asset tends to decrease," Mr. Davies noted in a recent interview with MSN.

While plenty of ink has been devoted to staff reductions on the loan production side of the business, Mr. Touhey said that lenders are in a position to re-evaluate servicing staff levels as well. That's because loan boarding and payoff departments are less busy than they were during the peak periods of refinancing, allowing staff to be reallocated to areas such as customer service or escrow management.

He said that many servicers hired temporary employees to manage tasks driven up by portfolio churning during the refi boom and are already scaling back in those areas. Mr. Touhey said that servicers that have a detailed understanding of their cash flows and the components of those cash flows stand to do very well now that portfolios have become more stable.

The challenge servicers face is finding ways to minimize costs without impeding business growth or risk management. In addition, servicers are attempting to derive more income opportunities form their portfolios.