In a world with $100 billion servicers, smaller players are examining their mortgage servicing operations to determine whether they can compete with the big players.

This was evident at a session on servicing viability - whether to remain in the business - at the Mortgage Bankers Association's annual servicing conference in New York last week.

"We need to explain the dynamics of our business to parent companies," said Mary Bruce Batte, a managing director at Mortgage Dynamics Inc., McLean, Va. She said some parent companies do not reap the potential benefits of a mortgage unit, such as building revenues by selling bank products to mortgage borrowers.

Mortgage Dynamics consultant James E.P. Ring, citing the association's 1994 cost-of-servicing study, said that its not cost effective to hold a servicing portfolio of less than $250 million. Such companies should sell existing portfolios, he said, and sell originated loans with the servicing rights included.

"Other groups showed excellent profitability trends," Mr. Ring said. Servicers have to boost volume through either wholesale business or acquisitions to remain profitable.

According to the association's study, servicers with portfolios of between $250 million and $1 billion reduced servicing expenses 2% and total expenses by 12.6% from 1992 to 1994. For the same period, servicers with portfolios between $1 billion and $4 billion cut servicing expenses 7% and total expenses by 24%. Servicing expenses for those with portfolios larger than $4 billion were down 33%, and total expenses were down 34%.

Mr. Ring suggested that a servicer could perform servicing functions for portfolios of other companies to utilize excess capacity.

Servicing income was up the most for servicers with portfolios between $1 billion and $4 billion, with a 15% increase between 1992 and 1994.

Mr. Ring concluded from the statistics that servicing was not cost- effective for those with portfolios under $250 million and that they should sell their portfolios, have them subserviced, or sell the servicing rights along with the loans as they are originated.

For larger servicers, he pointed to a need for further automation to increase the number of loans serviced per employee. He also said some servicers could benefit from performing subservicing to increase volume.

More broadly, he said, servicers could benefit from increased emphasis on wholesale business to build volume faster.

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