Servicers See a Silver Lining.

2003 was the worst of times and the best of times for the mortgage servicing industry, according to data culled from the MBA's annual cost study.

First, the bad news: servicers lost more money per loan than ever before, due to heavy amortization and impairment costs. The MBA cost study shows that, on average, servicers experienced a net financial loss of $166 per loan in 2003, up sharply from a loss of $100 per loan in 2002.

But, at the same time, servicing managers can take some credit for boosting their operational results. Excluding financial factors such as amortization of servicing rights and gain or loss on servicing values and hedges, servicers actually made money on an operational basis. And they improved their operational margin for at least the fourth year in a row, according to the MBA.

Lenders participating in the cost study reported net servicing income - that's right, income - of $353 per loan in 2003, up modestly from $348 the year before. But the data show direct servicing income has been growing steadily in recent years, so that by 2003 servicers enjoyed net servicing income that was almost 25% higher than it had been in 2000.

Marina Walsh, director of industry analysis in the MBA's research department, said that one reason net servicing income has been rising is that average loan sizes are getting larger. That means the dollar volume of the contractual servicing fee, calculated as a percentage of the loan, is also rising. By segregating out direct net servicing income from net financial income, the MBA is helping lenders understand better the drivers of servicing profitability.

"Direct servicing net income is supposed to represent what servicing managers can control to some extent," Ms. Walsh said.

She told MSN the net financial loss servicers experienced last year was a little bigger than she might have expected, possibly reflecting the number of large lenders that participate in the cost study. But with portfolios churning from refinancing activity, higher-than-expected amortization and impairment costs were inevitable last year.