Technology Costs Driving Small Servicers from Field

The high cost of technology is making it tough for small and midsize mortgage servicers to compete with the industry's behemoths.

That's what led First Bank System, Minneapolis, to arrange the sale of its mortgage unit, FBS Mortgage, to Bank of America and two other lenders. The deals were announced this week.

As companies such as First Bank depart, the big players are swallowing their portfolios and getting even bigger. Five companies now service more than $100 billion of loans each.

"It's tough to be a small servicer," said Barbara Smiley, an analyst at Tower Group, Wellesley, Mass. Many automation systems that can push servicing costs down are too expensive for small companies, she said.

"We will end up with a small number of enormous superservicers," but many niche players will continue to exist, she added.

But even the big servicers may be asking for trouble. One consultant said that many banks that are buying mortgage companies are unaware that bank technology is not necessarily compatible with mortgage servicing technology.

"If a bank buys a mortgage company because they think they can merge their technology or find economies of scale at the mortgage bank using the bank system, they'll be disappointed," said Leilani E. Allen, director of mortgage banking services at Tenex Consulting, Burlington, Mass.

"It is possible, but it is a big undertaking and investment. It will probably only pay off over time, and it would not be easy," Ms. Allen said.

Countrywide Credit Industries Inc., Pasadena, Calif., the nation's largest servicer, with a $126 billion portfolio as of June 31, says it depends on technology to keep its costs down and its service consistent.

Richard DeLeo, executive vice president in charge of Countrywide's servicing, said that there are 95 full-time technology staff members who constantly look for ways to improve the servicing system.

He said Countrywide is able to use its technology more effectively than its competition does because it does not use a service provider, such as CPI, and the technology staff reports directly to him.

"When we see something that will provide us with economies of scale or will provide better service to our customers, we can provide it and make it happen," Mr. DeLeo said from Countrywide's servicing facility in Simi Valley, Calif.

Over the last two years, such former heavy hitters as Amsouth Bancorp and KeyCorp have left the servicing arena.

When Amsouth stopped servicing mortgages, John W. Woods, Amsouth's chief executive, said the move would allow the company to reduce its staff and improve its efficiency ratios.

Ms. Smiley said that superregional banks, such as Norwest Corp., which has a large mortgage subsidiary, can exploit the customer information provided by servicing technology. The cross-selling potential will force continued consolidation as these banks seek more customers, she said.

Buyers of servicing portfolios often justify the premiums they pay by citing the cross-selling potential of a new customer base. The best way to tap that market is with technology. But while many banks talk about cross- selling bank products to mortgage customers, few have done it successfully.

Chemical Banking Corp. and Citicorp both tried to cross-sell to mortgage customers, Ms. Allen said, but only Chemical has been successful, and on a limited scale.

Brenda White, a managing director at UBS Securities, said that no company has made great strides in the development of new servicing technology. While the government-sponsored agencies Fannie Mae and Freddie Mac drive technology changes on the origination side, Ms. White said, it is more difficult for companies to develop new servicing technology.

"Most people are on CPI, and it's not as if anyone has spent the money it takes to build a better mousetrap, Ms. White said. "I'm not saying there is anything wrong with what is out there, but we are not light years ahead of where we were a few years ago. People are still using the same systems."

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