Mergers have continued to reshape the mortgage servicing landscape this year, and most observers expect the pace to pick up.

"The mortgage business is in the relatively early stages of consolidating," said Stephen J. Rotella, executive vice president of national operations and technology for Chase Manhattan Mortgage Corp., Edison, N.J..

Most of the servicing consolidation in the last year has taken place through acquisitions of thrifts and mortgage companies.

Washington Mutual Inc. leaped into the top 10 through its acquisition of American Savings Bank last year and Great Western Financial Corp. in July. The Seattle thrift services about $74 billion.

Temple-Inland Mortgage Corp., Austin, Tex., bought Minnesota-based Knutson Mortgage Corp. in May and as a result, its portfolio grew 35%, to $23.8 billion. Marine Midland Bank, Buffalo, N.Y., more than doubled its portfolio, to $20 billion, through its purchase of First Federal Savings and Loan of Rochester, N.Y., in 1996.

New York's Dime Bancorp announced in June that it was acquiring North American Mortgage Co., Santa Rosa, Calif. Dime will have a portfolio of more than $30 billion, once the transaction is completed in the fourth quarter.

In addition to thrift and mortgage company mergers, there were also large sales of servicing packages. Chase acquired about $17 billion in servicing from Source One Mortgage Services Corp., Farmington Hills, Mich. Chase is now just a few million dollars behind Countrywide Credit Industries, Calabasas, Calif., the second-largest servicer.

Prudential Insurance Co. of America completed its exit from the mortgage servicing business by selling off its $30 billion jumbo servicing portfolio to Citicorp Mortgage. Citicorp then sold $12 billion of the portfolio to Glendale Federal and $7/2 billion to Bank United Mortgage of Texas.

William H. Curley, president of Cohane Rafferty Securities, a Harrison, N.Y. mortgage investment banking firm and servicing broker, estimates that $250 billion of servicing rights will trade hands this year and that a similar level of servicing will be exchanged in 1998.

In addition, Mr. Curley predicts that at least three more large deals, sales of more than $5 billion in servicing, will take place this year.

This consolidation is occurring despite the fact that servicing prices are "quite healthy" according to Chase's Mr. Rotella.

Mr. Curley said he doesn't see prices coming down anytime soon because larger servicers have been able to lower their costs to administer loans. As a result, these companies can afford to pay higher prices for servicing.

"Most of the players in the top bracket are hungry for servicing," he said.

Other brokers say that even small packages of servicing are usually acquired soon after going on the market, proving that the appetite for servicing is greater than the amount that is available.

"There still doesn't seem to be an oversupply of servicing. It continues to be a sellers market," said Gerry Risi, managing director of Mortgage Marketing Services, a Fort Lauderdale, Fla., servicing brokerage firm.

As of midyear 1996, five servicers had more than $100 billion in their portfolio. NationsBanc Mortgage Corp. became the sixth member of the $100 billion club in 1997. It is the fifth-largest servicer, with a portfolio of $119.5 billion.

HomeSide Inc. is on the verge of eclipsing the $100 billion mark, with $91.6 billion in servicing at midyear. But speculation is rampant that NationsBank Corp. may buy HomeSide, a move that would make the Charlotte, N.C., bank the largest servicer. NationsBank announced it was purchasing Barnett Banks Inc. in August. Barnett owns 27% of HomeSide.

Of the top 10 servicers, only GE Capital Mortgage Services saw a decline in its servicing portfolio. The company's servicing shrank 5% to $101.6 billion. Sources said GE was focusing more on its profitable mortgage insurance division than the mortgage origination and servicing operations.

"They were once a major acquirer of servicing rights but that is no longer the case," Mr. Risi said.

Timothy F. Ryan, a partner in the mortgage banking group of Price Waterhouse, said that if the large mortgage servicing companies expect to maintain their portfolios, they must have a strong origination franchise.

"Anybody whose production isn't covering their run-off has a strategic question they need to answer," Mr. Ryan said.

Mr. Curley said two or three companies among the top 20 servicers have to make a decision to either get bigger or look at exit strategies. He declined to name the companies.

The servicing portfolio of H.F. Ahmanson & Co.'s Home Savings of America unit declined 3% to $58.1 billion. Home Savings, GE, and PNC Mortgage Corp. were the only three servicers in the top 20 to experience a drop in the size of their portfolios. PNC's portfolio declined slightly, from $40.6 billion at midyear 1996 to $40.4 billion at the end of June 1997.

Both Mr. Risi and Mr. Curley said that among the larger servicer, GMAC Mortgage, a subsidiary of General Motors Corp., is making it clear that it wants to build its portfolio substantially. GMAC, ranked 13th in servicing, has a portfolio of $54.6 billion, 14% higher than as of midyear 1996.

As the size of servicing portfolios increases for most of the top companies, these lenders now have a host of other issues to deal with that were unheard of a few years ago.

Servicing rights have to be carried on a mortgage company's balance sheet, with values based on the expected life of the loan, and changes reflected in the earnings statement. These servicing values can fall dramatically when rates go down, triggering a refinancing wave that cuts the expected life of loans already on the books. In 1993, the last time there was a major refinance boom in the mortgage industry, servicers weren't as large as they are now and they also didn't have all of their servicing on their balance sheet.

"If there is another refinance market, the potential for losses is much higher than in 1993 because all the servicing is capitalized," Mr. Ryan said.

This fact has made it necessary for servicers to hedge their portfolios with financial instruments that are designed to rise in value when rates drop. But hedging is still a relatively new phenomenon for mortgage servicers.

And size itself can be a problem if companies lack the technology to be able to manage the vast amount of loans in their portfolios. Mr. Curley says servicers are paying more attention to keeping costs down than ever.

"The companies on the leading edge of technology will drive costs down and be on the leading edge of servicing. It's that simple," Mr. Curley said.

But Mr. Rotella says he sees no reason why Chase can't continue to expand its portfolio. The company has consolidated all of its loans to one technological platform.

"I don't believe getting bigger means the portfolio becomes unmanageable," Mr. Rotella said.

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