As outsourcing of technology and processing gains legitimacy, the mortgage banking industry will split into large players who can afford the investment and achieve economies of scale and distributors who gain access to these advantages through alliances with service providers.

What the financial institutions will bring to the table is their distribution franchise, their brand name, their balance sheets, and their ability to take on and manage credit interest rate and prepayment risk. This group of institutions also sees the opportunity to generate collateral revenues.

The strategic advantage the distributors will have to achieve in order to succeed is best described as customer intimacy. Accessing sophisticated technology and processing expertise, combined with success at customer intimacy, will allow distributors to compete against the industry giants.

The obvious result of these trends will be a further, and likely rapid, consolidation of the industry.

As for the independent mortgage banks, I believe their window of opportunity is rapidly closing. They will have pricing disadvantages against companies that have lower costs of capital, and they will be competing against institutions that rightly or wrongly fervently believe the cross-selling story and place extremely high value on the consumer relationship.

Though Prudential Home Mortgage has had great success at selling closely related products such as homeowner's insurance and home equity lines, I am not aware of many other success stories that justify the intellectual appeal of cross-selling.

This relationship approach does, however, allow banks to rationalize attributing value to their originations. In addition, banks can leverage their capital for asset generation at far greater rates than mortgage bankers can.

With few exceptions, mortgage banks do not have access to the capital necessary to grow large enough to gain economies of scale and afford the technology investments that will be necessary.

Unless they can achieve some strategic advantage in distribution, such as Prudential's corporate relocation and affinity channels, brand name, central processing, direct telemarketing, or technology, mortgage bankers are likely to return to the same role they played, and market share they had, 15 years ago. Some banks will fail at mortgage banking, but others will succeed because they will have major strategic advantages over the independent mortgage banks.

If you don't have a strategic advantage, those that do will eat you for lunch.

I believe this consolidation trend will continue at a rapid pace because the pricing pressure will not abate as most forecasters are expecting.

First, there is simply too much capacity. Second, technology is rapidly expanding capacity and cutting costs. Third, banks trying to get big quickly will continue to price aggressively in order to achieve their goals.

In closing, here are two more forecasts. Both emanate from my belief that the cost of originating a loan will fall dramatically within the next five years. If this forecast is correct, it will have a dramatic impact on servicing values and mortgage intermediaries such as brokers.

It's not hard to envision the day when refinancings can be done for as little as $500. We have also educated consumers on how painless the process can be, especially with the ever-popular no-cost refinance.

With such low hurdles, the market will have to quickly adjust its prepayment assumptions, and purchased servicing rights are going to become much riskier. A lot of pain will be felt by investors in mortgage assets and servicers alike.

When consumers are able to go directly to an originator or end investor for about $500, the price umbrella will collapse and so will the market share of the middleman. Originators will become dependent on their abilities as direct marketers. Just as hedging and risk management skills will trade at premiums, so will direct consumer marketing and telemarketing skills.

Mr. Swedroe is vice chairman of Residential Services Corporation of America.

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