Big Isn't Always Best When Servicing Commercial Mortgages.(forecasts and trends of mortgage debt outstanding)

Commercial and multifamily mortgage debt outstanding has touched $2.29 trillion at the end of 2004, representing a major opportunity for commercial servicers. One major competitive factor that has been cited in servicers obtaining and maintaining market share is economies of scale. So what exactly goes into the economics of loan servicing? A case study of four different servicers by Roy Owen, a principal with Amsterdam Advisors, and Diana Reid, managing partner, Beekman Advisors, delves into this topic (the study was presented in a recent Mortgage Bankers Association teleconference).

The companies they studied are a portfolio lender (a primary servicer with 12 full-time employees and a $8 billion portfolio of 1,000 loans), a GSE mortgage banker (a primary servicer with 14 full-time employees and a $6 billion portfolio of 650 loans), a regional mortgage banker (a primary and subservicer with five full-time employees and a $2 billion portfolio of 500 loans) and a large national servicer (a master, primary and special servicer with 500 full-time employees and a $105 billion portfolio of 15,000 loans).

The information provided about the servicers has been disguised a bit so as not to reveal their true identities. As for how representative they are of the larger commercial servicer world, these are all established servicers who have been in business for a while, according to Ms. Reid. As a backdrop to the study, the presenters noted that the servicing business has become increasingly complex, especially in the commercial mortgage-backed securities world. "It is not just clipping coupons anymore," Ms. Reid noted. At the same time, fees paid to third-party servicers have gone down over the same period.

The study found that the cost per loan was lowest in the case of the regional mortgage banker at $1,000, with the large national servicer next at $2,000, followed by the GSE mortgage banker at $3,000 and the portfolio lender at $5,500. The regional mortgage banker's personnel cost accounted for the highest component of their cost structure at 66%, followed by occupancy costs at 16%, other overhead at 12% and vendors at 4%. This servicer's outsourcing costs accounted for a mere 2% of their total cost and they did not have technology-related costs.

In comparison, the large national servicer's personnel costs accounted for 47% of total cost, followed by technology at 18%, occupancy costs at 6%, other overhead at 16% and vendors at 4%. ...