$100B Club Getting Less Exclusive

Consolidation was king in the home mortgage servicing industry in the first half of this year, allowing the largest servicers to expand their portfolios far beyond what anyone thought was necessary or possible just a few years ago.

In fact, the volume by the top 25 servicers topped $1 trillion at midyear with a surge of 22% since midyear 1994.

In the first half of this year, three servicers topped the $100 billion mark - joining a club that had a membership of one. The swift growth of these companies can be attributed to their effort to attain economies of scale - servicing as many loans as reduce the cost per loan.

At the end of last year, Countrywide Credit Industries, Pasadena, Calif., stood alone. It now has the company of GE Capital Mortgage Services, Fleet Mortgage Group, and Norwest Mortgage, all of which broke $100 billion with acquisitions in the last six months.

Countrywide has led the pack since 1993, but its preeminence is in peril. Once the Chase-Chemical merger is complete, the new Chase Manhattan Corp. would be the largest servicer, with a portfolio of more than $130 billion, unless Countrywide puts on a spurt in the next few months. And if Norwest Mortgage purchases a portion of Prudential Home Mortgage's portfolio, as it is reportedly preparing to do, it is likely to vault ahead of Countrywide.

In the first half, Norwest had the largest increase in servicing volume among the top servicers, with a 40% increase in loans serviced since yearend 1994. Source One Mortgage Services, Farmington Hills, Mich., had the largest decline, losing more than 27% of its servicing volume in the first six months of 1995.

Jonathan Gray, an analyst at Sanford C. Bernstein, said that in an industry where the top 30 servicers account for 40% of all single-family home mortgages, consolidation of servicing has been going on for the last 10 to 15 years. He expects it to continue as the large servicers strive for cost efficiencies through size.

Figures compiled by American Banker indicate an even stronger concentration, with the top 25 companies accounting for 31.1% of all servicing for investors at midyear. This is up by a dramatic four percentage points in just one year.

When servicing for their own portfolios is included, the concentration among the top 25 rises to about 38% at midyear, from about 32% a year earlier.

"There are some smaller companies that go out of business as the larger companies continue to consolidate," Mr. Gray said. But as was the case with Lomas Financial Corp., which declared bankruptcy earlier this month, he added, some larger companies fail to compete and go out of business.

Economies of scale attainable by the large servicers is significant in keeping costs down. Because it uses the same systems and staff to service more loans, a large company's cost per loan may be only 7 to 12 basis points, compared with 12 to 20 for a smaller, less-efficient servicer, Mr. Gray said.

Another analyst said that small servicers can flourish, as long as interest rate levels allow them to continue originating loans to keep replenishing their portfolios.

"With a favorable interest rate environment and a flat yield curve, the pie should expand," said Richard Strauss, an analyst with Goldman, Sachs & Co. analyst, and smaller servicers should be able to take their share, as long as they can keep up production.

"Companies like these big servicers have an advantage because they have invested in their infrastructure so servicing will be more profitable" than for the smaller servicers, Mr. Strauss said.

An industry economist said that current interest rates benefit all servicers, regardless of size.

The shift in the interest-rate environment toward fixed-rate loans and away from adjustables is a better one for servicers, said David Lereah, chief economist of the Mortgage Bankers Association of America.

"Lower delinquencies and foreclosures are associated with fixed-rate loans," versus adjustable-rate loans, he said.

Even though adjustables are leaving the portfolio, they are replaced with fixed-rate loans, Mr. Lereah said, which is better for the quality of the portfolio in the long run.

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