The times they are a-changing.
It has come to the point that companies with $10 billion servicing portfolios are making a mad dash for the exits because they can no longer compete in the world of gargantuan $100 billion-plus servicers.
Consolidation has created a small group of servicers that is grabbing more and more market share. Last year, you had to add up the top 25 servicers to reach $1 trillion in assets. This year, the top 10 service over $1 trillion.
Thomas J. Healy, director of mortgage banking strategies at CoreStates Capital, said that it is essential for midsize players to expand their business as well if they want to stay competitive.
"When servicing revenue drops, the costs don't drop as quickly," Mr. Healy said.
Many observers think that the consolidation taking place among companies already in the upper echelon of the mortgage servicers will continue and at this rate, only a handful of major servicers will be left in a couple of years
"This industry is becoming more and more like the airline industry. There may be only 10 or 15 major companies in the next few years," said Christine Clifford, vice president of Wholesale Access, a research and consulting firm based in Columbia, Md.
Mr. Healy said that although some people think companies are overpaying for servicing portfolios, he believes that the big players are not and that their success makes it even more difficult for others to compete.
Paul Van Valkenburg, principal of MIAC Risk Management Services, said that because there is no dominant industry figure, consolidation will continue.
"It's even more competitive when you have more big players," he said.
If many of the midsize servicers continue to sell their portfolios, Ms. Clifford said small servicers will have a tough time competing for any servicing rights that the $100 billion beasts have not gobbled up.
"Those that are left will have to fight over the crumbs," she said.
Other observers say consolidation isn't the only reason why small and midsize servicers are finding it increasingly difficult to keep pace with the giants.
Brenda White, managing director at UBS Securities, said that a majority of originated mortgages are done by wholesalers - as opposed to retail branches - and that the top originators of mortgages have a high percentage of loans produced from correspondents and brokers.
"The gravitation of servicing to large players is not just as a result of the merger and acquisitions activity, but also as a result of how originations are getting conducted," Ms. White said.
The top 10 servicers accounted for nearly half the total servicing done by the top 100. The top 100 serviced $2.2 trillion in residential mortgages as of midyear. This is an increase of almost 25% from the same period last year.
With so much consolidation, Mr. Healy said, interest rate volatility and hedging of portfolios take a back seat to a more pressing concern. "The question I'm most often asked is 'Should I be in this business?' " Mr. Healy said.
Several companies have decided that they don't.
Last year, Amsouth Mortgage sold part of its servicing portfolio to G.E. Capital. Amsouth serviced almost $15 billion last year and ranked 33d among servicers. This year Amsouth's portfolio is only $6.2 billion, and Amsouth plummeted to 74th.
FBS Mortgage's servicing portfolio was sold earlier this year to BankAmerica Mortgage. The subsidiary of First Bank System in Minneapolis serviced nearly $10 billion last year.
More recently, Weyerhaeuser Co. announced that it is seeking buyers for its mortgage subsidiary. Earlier this year following months of speculation, Weyerhaeuser Mortgage sold more than half of its servicing portfolio. It now has a servicing portfolio of about $4.5 billion, down nearly 60% from the same period last year.
Even companies that have increased their servicing assets have found it difficult to remain competitive. Citizens Mortgage, with a servicing portfolio of $12 billion, moved from No. 55 last year to No. 41 this year thanks to portfolio growth of 33%.
Nonetheless, the company decided earlier this month to put its servicing portfolio on the block. Citizens said the portfolio was too small and that the company was unwilling to make acquisitions to grow it.
Some of the larger players also have departed. Prudential Home Mortgage, last year's fifth-largest servicer, was bought earlier this year by Norwest Mortgage.
But there are some challenges for Norwest and other megaservicers.
Mr. Van Valkenburg said an accounting rule change has had a major impact on servicing. Under FAS 122, a new rule from the Financial Accounting Services Board, servicers must include originated mortgage servicing rights as well as purchased servicing rights on their balance sheets.
FAS 122 was implemented last year, and servicers have until the end of this year to implement it. Most have done so.
As of midyear, there were five members of the $100 billion servicing club. NationsBanc Mortgage Corp. will become the sixth entrant once it finalizes its deal for Boatmen's Bancshares.
Just a year and a half ago, Countrywide Credit Industries was the only company with a servicing portfolio over $100 billion. It since has slipped to No. 2.
In addition to Norwest, Chase Manhattan Mortgage, last year's sixth- largest servicer, leapfrogged to third when its parent, Chase Manhattan Corp., merged with Chemical Banking Corp.
Homeside Lending, the company created earlier this year through the merger of BancBoston Mortgage and Barnett Mortgage, is nearing $100 billion and ranks seventh.
First Nationwide Mortgage Corp. cracked the top 10 thanks to its purchase of what was left of Lomas Mortgage's servicing portfolio. First Nationwide also bought San Francisco Federal Savings and Loan Association.
Mellon Mortgage also has been an active buyer. The company acquired Metmor Financial last year and saw its servicing portfolio grow 46%. Mellon is now the 11th-largest servicer, moving up from No. 17 last year.
Ms. Clifford doesn't see much hope for midsize servicers.
"The Norwests of the world are going to win," she said.
