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Profit Run Might Stall.(Operational Profit Per Loan)
WASHINGTON -- While the financial performance of servicing rights has been volatile in recent years, the industry's operational profits have continued to rise steadily, according to an analysis by the Mortgage Bankers Association. In fact, servicers have been posting annual gains in operational profit per loan dating back at least six years, with the strongest annual increase coming in 2005.
Those gains have been driven by rising loan balances, which boost servicing revenue, and strong credit performance, which helps keep costs in line. But with home price growth slowing and delinquencies rising, one of the MBA's top researchers says that growth in servicing profitability could slow once 2006 numbers are compiled.
Marina Walsh, director of industry analysis in the research and business development department of the Mortgage Bankers Association, said that hedging of mortgage servicing rights also proved challenging amid the flat yield curve environment last year, a condition that has persisted into 2007.
"No one's hedges seem to be working based on our preliminary data for 2006," she told MSN.
She said that servicing fees will likely come in flat for 2006, while the direct cost of servicing per loan may increase, putting some pressure on operational profitability.
In addition, an increase in delinquencies may mean that servicers have to incur additional interest expense related to advances they make to MBS investors. That additional interest expense could also crimp profitability, depending upon the relationship between a servicer and its investors.
"It will affect direct expense and it will also affect the MBS interest expense."
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