The merger deal unveiled last week by two of the eight major mortgage insurance companies shows that even a small field can start to feel overcrowded in today's competitive financial services industry.

The $650 million deal pairs Amerin Guaranty Corp., one of the industry's innovators, with Commonwealth Mortgage Assurance Corp., a more traditional mortgage insurer, to create what would be the second-largest company in the small sector.

Lenders said consolidation reflected the realities of a competitive mortgage market in which cost savings are paramount.

"The general rule in a business with thin margins like mortgage lending is, 'If you can do more business with fewer suppliers, you end up with better relationships,'" said A. William Schenck, chief executive officer of Fleet Mortgage Group, Columbia, S.C. "With all the suppliers we use, we're looking to have fewer relationships rather than more."

Though Amerin and CMAC have complementary strengths that made it easier for them to pair off than some of the other mortgage insurers, most observers predict additional deals will follow.

"I think you'll see more mergers in the industry, perhaps getting down to five, even four companies, two-and-a-half to three years from now, if not sooner," said Charles Titterton, analyst at Standard & Poor's.

Mortgage insurers cover the risk of default on low-down-payment loans for portfolio lenders and for Fannie Mae and Freddie Mac, the government- sponsored enterprises that buy mortgages. Freddie and Fannie will not buy loans with down payments of less than 20% unless they come with mortgage insurance.

The industry has come under pressure in recent years from alternatives such as "piggyback" loans, which combine an 80% first mortgage with a 10% second lien mortgage and a 10% down payment. Meanwhile, lenders have put more pressure on insurers to reduce prices and offer costly services like contract underwriting, captive reinsurance, and pool insurance.

Amerin, founded in 1992 by financial guarantee guru Gerald L. Friedman, was something of an upstart among mortgage insurers. The Chicago company focused on selling insurance to the top lenders, and its sales force marketed products to top executives rather than to loan officers.

Amerin also had a penchant for inventing products such as lender-paid mortgage insurance, which was controversial when introduced but is now sold by most mortgage insurers. It is credited with introducing price competition into what had been a comfortable oligopoly.

But innovation "only got us so far," said Mr. Friedman. Recently, he said, he saw "some ominous winds I didn't like." The costs of certain services it supplied, such as contract underwriting, were rising. With only 8% market share of new insurance written, and an even smaller share of insurance in force, Amerin "would be less equipped than some of the bigger companies to compete in the future."

Luckily, it found a partner with which it could build economies of scale without creating redundancies. CMAC, based in Philadelphia, has a large client base composed mostly of midsize lenders and a sales force that cultivated loan officers and others at the grass-roots level.

"This was the no-brainer transaction," said Edwin Ciskowski, analyst at SunTrust Equitable Securities. "There's virtually no overlap at all."

Roy Kasmar, president and chief operating officer of Amerin, who would retain his titles in the new company, said other mergers between mortgage insurance companies could create cost savings but not necessarily business growth.

"Our businesses do not cannibalize one another," he said. "That may or may not be true in some other possible combinations."

Mr. Ciskowski noted that General Electric, which owns GE Capital Mortgage Insurance, Raleigh, N.C., wants to be in the top two of whatever industry it is in. The merger between Amerin (the seventh-largest mortgage insurer, in terms of new policies written) and CMAC (fifth-largest) would bump GE Capital from the No. 2 spot.

"That's not a position GE is typically comfortable with," Mr. Ciskowski said. "I would look for GE to look at whether it wants to be in this business."

A GE Capital spokesman acknowledged that being in the top two is a well- known objective of GE chief executive officer Jack Welch but added, "It's much too early to tell if we would be No. 3. We are very committed to the mortgage insurance business and to serving mortgage lenders broadly."

At least one of the two merging companies' competitors said CMAC and Amerin stand to lose some customers as a result of their merger. "The personalities of the two companies are very different," said Glen Corso, assistant vice president at PMI Mortgage Insurance Co., San Francisco.

"The qualities that may have attracted lenders to Amerin may or may not be present in the combined company. You may have some companies decide, 'Amerin-CMAC is like everyone else. Why stick with them? Let's see what else is available.'"

Officials at Amerin and CMAC insisted that their corporate cultures will meld seamlessly. Mr. Friedman said he did not see the new company "losing any of Amerin's creativity."

This year, Freddie Mac tried to broaden its federal charter to let it self-insure some loans. Insurers and lenders mobilized against the move and ultimately defeated it, but the GSEs are expected to continue to seek alternative forms of credit enhancement.

"The industry remains under a lot of macro-competitive pressures, which are likely to encourage people to seek mergers," said Jay Siegel, analyst at Moody's Investors Service.

Still, Mr. Friedman pointed to the recent financial market scare as evidence that demand will not disappear.

"Because people continue to be concerned with credit risk as we saw in the summer when all the debt markets except Treasuries began to unravel, there will be a new healthy respect for private mortgage insurance," he said.

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