Furious consolidation is underway in the mortgage arena as big banks chase and swallow mortgage bankers. But the mortgage banking pond still offers safe habitat for minnows.

Revolutions in banking seem like a dime a dozen these days, but the revolution in the mortgage business is the real McCoy. Once an industry dominated by savings institutions, it's been shaken by heavy inroads by mortgage bankers and now commercial banking companies.

Consider forays by major banks this year alone. Chemical Banking Corp. has agreed to buy Margaretten Financial Corp. for $330 million; PNC Bank Corp. announced plans to buy $10 billion in servicing from Associates Corporation of North America; Fleet Mortgage Corp. plans to buy $3.8 billion in servicing; Boatmen's Bancshares said it will buy National Mortgage for $155 million, and BankAmerica Corp. plans to buy Minnesota's United Mortgage Corp.

Rumors have even been swirling that BankAmerica has tried to acquire Countrywide Funding Corp., the nation's largest mortgage banker. Both sides have declined to comment.

Superregional and larger banks were often bit players in the refinancing boom of 1992-93 that filled mortgage bankers' pockets with loot. Now, flush with capital they are anxious to deploy, banks have decided to grow their mortgage businesses--even though the boom-and-bust origination cycle is now on bust. And so the big will only get bigger.

That's reflected in market share. The top 10 originators generated 25% of all mortgages in the first quarter, up from 15% in the same period in 1991, according to Salomon Brothers. The change in servicing is less dramatic: the 10 largest held an 18% share in the first quarter, up from 15% three years ago.

Big banks are making the most noise, but there's other deal-making going on. Mortgage bankers themselves are merging. First Town Mortgage Corp. of Secaucus, NJ, and Victoria Mortgage Corp. of Irvine, CA, announced a merger in late June; together, the two originated $2.3 billion in loans last year.

Yet several mortgage experts say they don't see the industry going the way of credit cards, where volume is critical and small players struggle to survive. There's opportunity, they say, for local thrifts and community banks to keep attracting mortgage customers if they're willing to compete on rate.

"I've never seen the small people impacted. They seem to do okay; they get their share," says George Yacik, vice president of SMR Research in Budd Lake, NJ. "In fact, they were getting a big share of the refi market."

"It's still a business in which smaller-scale players can make money and can succeed," says Norman Katz, managing principal of MCS Associates in Irvine, CA.

Indeed, it isn't just huge banks that are buying. Dauphin Deposit Corp. of Harrisburg, PA, announced in late May that it was buying Eastern Mortgage Services in Trevose, PA, a firm that originated almost $1 billion in mortgages last year. Alabama's Colonial BancGroup, with $2 billion in assets, recently agreed to buy Colonial Mortgage--owned by the banking company's CEO, Robert E. Lowder, and his brothers--and its servicing portfolio of $5 billion.

Mortgage banking is hardly a slam dunk, however. Margins are thin, and rate competition can be fierce. Falling rates can precipitate a rash of prepayments--triggering large writedowns in the value of mortgage servicing rights. And most banks remain slaves to spread income, running their balance sheets to match maturities of assets and liabilities, while mortgage bankers try to match pricing against commitments for delivery to the secondary markets. What's more, the mortgage banking sales culture is a lot closer to a bank's boiler room than to its marbled lobby.

Originations Plummeting

Another obvious concern is originations. Swollen by refinancings in the past two years to unsustainable levels, they have plummeted amid this year's rising rates. SMR projects that they will fall to $600 billion this year from over $1 trillion in 1993. With adjustable-rate loans staging a big comeback this year, fixed-rate purveyors have seen business fall off a cliff--and have been looking anxiously toward the exits.

In this sellers' market, there's a danger that acquirers will overpay. Predictably, the flurry of deal-making has sent stock prices up, especially for several mortgage banks that have said they are (or are perceived to be) on the block. But "the market still hasn't priced the risk factors in mortgage banking," says Michael Horn, national director of KPMG Peat Marwick's mortgage banking practice.

Until serious investments are made to address the technological inefficiencies in mortgage lending, small fish shouldn't be overly worried, experts say--especially on the origination side. "There will always be room for small players in niche markets, though that may not be in servicing," Horn says.

"If all of these (big) guys would fall in love with servicing, that's fine with me," says Robert Halleck, CEO of $900-million-asset Maryland Federal Bancorp in Hyattsville, MD. "I'll sit here, and we'll originate all we can find." Halleck says his thrift has been picking up seasoned mortgage bankers disgruntled by changes made when their firms were bought by larger organizations.

For the largest banking companies, however, mortgage banking is as much about wholesale functions and servicing as it is making loans. PNC, for instance, has made warehouse lending--providing loans to other mortgage bankers--a key priority. "This product line enhancement will continue to build stronger relationships," says Saiyid T. Naqvi, president of PNC Mortgage.

At Fleet Mortgage, the nation's third-largest servicing entity, CEO Michael Zucchini says the latest deals "reaffirm our strategy of growing our servicing portfolio through bulk acquisitions, and we intend to be an active bidder on other servicing portfolios as they become available."

Gobble, chew, swallow.

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