We believe that several additional forces will hasten the pace of consolidation in the mortgage industry, and in the process tip the scales further toward large, efficient players.
First, underwriting systems will dramatically reduce costs and increase service quality in originations by moving decision-making capability to the point of sale. The new systems will require much greater sophistication, as well as investment levels that may bar smaller players.
Second, as the time and complexity of originating a mortgage are reduced, alternative delivery channels such as telemarketing and video conferencing will grow in importance. These channels effectively increase the value of scale in origination while significantly reducing the value added by local originators. This creates even greater advantage for large players by giving them low-cost access to distant markets.
Third, marketing sophistication will become critical for large players to establish themselves as national players. The ability to analyze huge data bases, identify customer segments, and develop marketing to those segments, will become critical to sustaining volume.
Finally, these trends will feed on themselves. For example, as the forces reduce the cost and increase the convenience of refinancing, consumers will refinance more frequently. This will reduce the overall value of servicing and put further pressure on inefficient originators who rely heavily on selling servicing rights to stay above water.
For midsize and small players, however, all is not lost. They can still survive and prosper by leveraging their advantages and by taking action now to secure long-term positions that can be protected.
Ultimately, all players in the industry have several options:
*Make the investments now to cut costs and increase service. At the very least, these investments must help raise volume to the minimum scale necessary to compete. Obviously, this choice is best-suited to large or midsize companies with access to capital.
*Align with a player that can deliver the necessary efficiency. This approach is probably appropriate for smaller players who cannot build the required underwriting technology, but can leverage their consumer access. This option may also be fitting for a large player that cannot originate efficiently but still wants to provide mortgages to customers.
*Find a niche that can be protected. These niche markets involve a superior understanding of a consumer segment, such as people with poor credit or immigrants.
*Opt out of the business while the franchise still has value.
Mr. Bucca is a principal in the financial services practice at Booz, Allen & Hamilton, the New York consulting firm. Mr. Jewett is a senior vice president who has been involved in developing business strategies for lenders.
