Study: Nontraditional Loans Responsible for 85% of Profits.

New York -- A new analysis of the industry's profitability sheds some light on why lenders are rushing into the nonconforming market: because that's where the money is.

The study, by the international consulting firm of Mercer Oliver Wyman, concludes that while nonconforming and home-equity loans account for less than half of mortgage lending volume, they generate 85% of the industry's profits from loan origination and servicing. And that means mortgage servicers had better be prepared to manage more "weird" loans.

For purposes of the study, banks and mortgage lenders reaped an estimated profit of $29 billion to $32 billion in 2003 from home loan origination, servicing activities and related activities. Of that, the profit attributed to "conventional, conforming" lending was estimated at just $3 billion to $5 billion.

By contrast, the subprime, first-lien market accounted for an estimated $8 billion to $10 billion in industry profits, the jumbo market for an estimated $6 billion to $7 billion in profits, alt-A for $2 billion to $3 billion, and FHA/VA for $500 million to $1 billion. Home-equity lending also grabbed a big share of the industry's profits, with prime and near-prime home equity lending accounting for $5 billion to $7 billion of profits and subprime home-equity accounting for $1 billion to $2 billion.

The segments in some cases overlap, with "other prime" and "jumbo" being an example, according to Mercer Oliver Wyman, because explicit data sources are not always available.

But the authors say their segmentation "reflects the underlying business logic better than an artificially tidy segmentation with no overlaps."

The study groups the eight segments into four clusters: conventional conforming; jumbo, other prime and alt-A; subprime; and home equity.