Why large servicers' net operating-income seems to have spiked

Servicing has benefited mortgage lenders otherwise struggling with profitability and Mortgage Bankers Association numbers presented at a conference Thursday suggest it gave large players a particularly notable boost in first-half 2023.

Preliminary and pretax net operating-income for large depositories and independent mortgage banks with in-house servicing show that after a run of years with the per-loan average or below $300, the number jumped to above that level for the first time since the 2000s' housing boom.

It's worth examining factors leading to the increase to $366 in a market where mortgage companies on average have suffered several consecutive quarters in which the average player took a loss.

(The operating income number does not reflect financial costs such as hedging on mortgage servicing rights fluctuations.)

Larger loan balances that naturally boost servicing revenues paid in basis points per mortgage have been a key driver. These have been fueled by household formation demand that has outweighed limited inventory in a relatively strong economy.

Revenues associated with housing-related payments that servicers escrow for borrowers additionally contributed, Marina Walsh, the MBA's vice president of industry analysis, told conference attendees.

"Escrow earnings have also had a nice rebound this year because we had few prepayments, and not a lot of interest expense in advances because delinquencies are so low," Walsh said. 

Bonnie Sinnock

However, spikes in charges like taxes and insurance could jeopardize that if consumers have trouble paying.

A study by industry vendor Lereta found that the percentage of consumers who have reported recent increases in tax and insurance charges have been 57% and 38%, respectively.

Several other factors also could affect large players' economies of scale including whether strong loan performance continues. Distressed loans tend to have higher expenses.

Also a factor is larger servicers' ability to invest in cost-saving technologies, some of which are driven by artificial intelligence innovations that can produce operational efficiencies.

Economic conditions that affect both loan costs and performance also will be a determinant.

To date, job numbers closely tied to loan performance have remained relatively stable with hints of weakness in hiring, as consumers experience or evince some financial strain from inflation and high consumer borrowing rates, said Joel Kan, the MBA's deputy chief economist.

The unemployment rate was last pegged at 3.7%. Kan said it should be "closer to 4.5% by the end of this year or early next year, maybe peaking in late 2025."

So far, both the MBA and other providers of delinquency data say they haven't seen anything particularly worrisome in overall performance numbers.

While foreclosure starts did rise 43.3% on a consecutive-month basis in January to 34,000, the rise was partially seasonal, according to Intercontinental Exchange data inherited from its recent acquisition of servicing technology provider Black Knight.

"While January's jump in foreclosures is worth watching, serious delinquencies remain low, with 70% of such loans still protected from foreclosure, reducing near-term risk," ICE said in a press release Thursday.

Meanwhile, some differences will be at play between the outlook for different large institutions' servicing profitability.

Big depositories may have a great amount of older loans with smaller balances in their portfolios. IMBs may have a larger share of government-backed loans that tend to be more sensitive to performance issues.

A recent spike in delinquencies associated with Federal Housing Administration-insured loans isn't necessarily worrisome as it's been contained to earlier-stage arrears that could be resolved through foreclosure prevention programs, Walsh said.

Borrower loss-mitigation programs like the payment-supplement partial claim that the FHA recently finalized have some upsides in that regard, but they also create some challenges as their performance rates are unknown and they require some costs to implement.

So far the foreclosure prevention outcomes the MBA has been tracking since the pandemic suggests 75% of mortgages that go through workouts are performing, Walsh said.

However, she added that how many of these borrowers have been through multiple workouts is a question the MBA is researching. 

Conference attendee Donna Schmidt, founder of WaterfallCalc and a managing director at DLS Servicing, said numbers she's seen in her business suggest there's been an uptick in redefaults that may stem from repeat use of the streamlined loss mitigation that's proliferated since the pandemic.

"In 2022, 5% of the FHA loans that were run through our system had a previous partial claim. In 2023, it was 24%," she said.