The exclusive $100 billion mortgage servicing club may close its doors to new members before the year is out. It could have eight members by then, possibly nine.

At the top of the list, the combined NationsBank and Bank of America would be No. 1, slightly ahead of Norwest Corp., and well ahead of third- place Countrywide.

GE Capital Mortgage dropped out of the club last year as its portfolio shrank. Any buyer of its portfolio would automatically become a member of the club, and its $96 billion of servicing was said to be for sale early this year, though GE denied the reports.

Rumored as possible suitors were Citicorp and Chase Manhattan. Chase, at $169 billion, is already in the club and would rocket to the No. 1 spot if a deal went through.

Citicorp, well down on the list at $57 billion, would become a club member if it bought the GE unit. Such a deal appears unlikely in the wake of Citicorp's planned merger with Travelers Corp., which would add a few billion to the Citicorp servicing total. So the prospects of a deal for GE have shriveled, if they ever existed.

Washington Mutual will be a member when it closes the deal for H.F. Ahmanson. And HomeSide solidified its membership by acquiring Banc One's $18 billion portfolio. But the HomeSide purchase means the merged Banc One and First Chicago NBD will stay well down in the servicing rankings.

A likely newcomer to the list will be Golden State. When all the knots have been tied, the California thrift will encompass First Nationwide, California Federal, and Glendale Federal. This cluster is on the cusp of $100 billion and will likely pass the mark by midyear.

In a surge of activity, GMAC Mortgage came closer to the $100 billion mark by acquiring the $28 billion portfolio of Wells Fargo, bringing its holding to nearly $90 billion.

Farther down on the list, the prospects are sparse: Mellon Mortgage, $64 billion; First Union Mortgage, $60 billion; and Citicorp, $57 billion. And there are only a few smaller servicers or portfolios they could acquire to top $100 billion - some of them clearly not for sale.

Mellon is something of a wild card. It was rumored earlier this year to be positioning itself for significant servicing acquisitions when it consolidated its loan servicing system with vendor Alltel. It had also been using Fiserv's system and was said also to have looked at the Excelis system owned by First American before giving Alltel its entire account.

The large capacity of Alltel's system gave rise to talk that Mellon was on the prowl for more servicing. The hostile takeover bid for Mellon by Bank of New York may have temporarily derailed any plans by Mellon. Bank of New York does not have a significant servicing portfolio.

As a result of the 1997 consolidations, the market share of the top 25 servicers, about 47% at yearend, should be crossing the 50% mark during the year.

But how significant is it to be in the $100 billion club, other than bragging rights?

Angelo R. Mozilo, vice chairman of Countrywide Credit Industries, Calabasas, Calif., says there is a marked drawback to getting bigger in servicing: the bigger you are, the more loans you must originate to replace those lost to prepayment. And in a heavy refinancing period like the present, replacement ability becomes crucial (see article and table, page xx).

Limits to the economies of scale are detected by some observers. While large servicers have the lowest servicing costs, the biggest of them appear to have slightly higher costs, possibly because the mix of loans in their portfolios includes more hard-to-service paper. But while scale-related economies are scarce at the top, the biggest servicers can make a profit on servicing they acquire from the less-efficient.

And bigness is no guarantee of profitability. Wells ranked No. 19 with a portfolio of $28 billion but was no longer originating loans when it sold out to GMAC Mortgage, and Banc One ranked No. 33 with $18 billion when it dealt its portfolio to HomeSide.

Douglas Duncan, senior economist for the Mortgage Bankers Association, says bigness could indeed be a peril. "We haven't yet seen a serious recession" since the advent of the $100 billion servicers or even earlier, he said. "The most costly part of servicing is the delinquency/foreclosure/loss mitigation functions. We haven't tested that end of it yet."

Delinquencies and foreclosures were stable last year in most areas of the country. But a higher concentration of riskier loans was made in 1997, according to Mortgage Information Corp., San Francisco, and that could result in some increases as 1998 wears on.

But subprime loans, whose volume surged during 1997, were problematic, reaching a high by the end of the year.

In any case, most companies are using hedging strategies to protect their portfolios, Mr. Duncan noted, but those strategies haven't been put to a stringent test.

Mr. Duncan also questions the value of cross-selling to mortgage customers. "I think it remains to be seen whether those servicers that are getting in the hope of cross-selling can translate their intentions into reality," he said.

"I've asked a lot of companies how they measure the success of cross- selling," he said. "And I haven't gotten a good answer from anybody."

Mr. Duncan said he had asked many servicing managers whether they receive credit for the cross-selling value of their customer lists. Nobody he talked mentioned any quantitative cross-sales value attached to the servicing portfolio.

"We'll get a preview of how well the hedging works over the next few quarters," he said, pointing to the loan runoff generated by the recent refinancing boom.

While prepayments accelerated across the country in the second half of last year, they were especially intense in a few hot spots around the country. Heavy prepayments drain loans from servicing portfolios, especially when the servicers' origination capacity is limited.

According to Mortgage Information, prepayments were about double the national average in San Jose, Calif.; Detroit; and San Francisco. Salt Lake City, a hot market for loan growth, had prepayments about two-thirds higher than average, as did Oakland, Calif. Chicago, Grand Rapids, Mich., Fairfield County, Conn., and Denver also had high prepayments.

In another byway of servicing, Mr. Duncan also pointed to a growing practice among some large servicers of performing subservicing for others and farming some of their own work out to other subservicers.

"They've broken down their areas of servicing into what they are good at and what they are not good at," Mr. Duncan said.

Data on servicing costs in 1997 are not yet available, but experts expect little change since 1996. This means costs likely were widely disparate from company to company. On the top end, the most efficient servicers are incurring costs of $25 to $40 a loan, while the least- efficient are laying out $300 a loan. At the high end, servicing is a losing proposition and viable only for lenders who hold loans in their own portfolios, and who thus have interest income to offset the servicing costs.

The $100 billion club has taken on an interesting profile: only one independent mortgage company is on the list, and only one thrift. The others are all bank-owned mortgage companies and represent a major shift for banks into mortgage banking and, to a large extent, away from portfolio lending.

The No. 1 company in both originations and servicing at yearend was bank-owned Norwest Mortgage. Independent Countrywide was second in both categories, and bank-owned Chase was third.

The three dominated originations, with Norwest at $55.3 billion, Countrywide at $43.1 billion, and Chase at $40.1 billion. Fourth-place HomeSide was way down with just $21.7 billion and missed the $100 billion servicing mark with $99.2 billion..

Of the top 50 originators, 31 were bank- or thrift-owned; seven were specialists in home equity or subprime loans; two were owned by nonfinancial companies; and the rest were independents of various kinds.

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