Servicing Profits Return as Rates Rise.

Washington -- Last year, gravity pulled the industry's profitability back toward earth after a stratospherically successful 2003, but servicing rights helped many lenders weather the fall to some extent.

While servicing profits fell 50% last year, according to a recent cost study from the Mortgage Bankers Association, servicing reversed its course and turned profitable after being hampered by heavy refinancing in 2003.

In fact, secondary marketing income - which includes capitalized loan servicing rights - averaged $1,661 per loan in 2004. That made secondary marketing income, fueled in part by improved servicing values, the biggest contributor to the bottom line of the mortgage industry last year.

Lower amortization and impairment expense was, not surprisingly, the key to improved servicing performance. Per loan financial profits from servicing, net of hedging gains and losses, averaged $21 last year. While that doesn't sound like much, it's a dramatic improvement from a net loss of $166 per loan on average in 2003, when record-breaking refinancing fueled portfolio runoff.

The largest servicers reported stronger operational results than smaller servicers, but they also took larger impairment and amortization hits than smaller servicers, the MBA noted.

Marina Walsh, an MBA economist, told MSN that the cost survey raises questions about the ability of servicing to act as a natural hedge against declines in loan origination profitability. That's because servicing profits, relative to loan funding profits, are a small component of the industry's total earnings. In short, it's easier for top funders to offset loan servicing losses in a low rate environment than it is for servicers to offset lost loan origination income in a rising rate environment. In addition, because large servicers hedge the interest rate risk inherent in their portfolios, some of the gains that could be accrued in a rising rate ...