Large mortgage banks' servicing portfolios will mushroom during the next five years while small lenders scamper to find niches they can mine, a veteran industry executive predicted.

The handful of lenders each of which already services more than $100 billion of loans will see fourfold growth in the half decade, said Gerald L. Friedman, chairman of Amerin Guaranty Corp., a Chicago mortgage insurer. Mr. Friedman entered the industry in 1961 as an executive at Mortgage Guaranty Investment Corp.

The large lenders, including Norwest Mortgage and Fleet Mortgage Group, can "fully utilize automation" to be extremely effective, he said.

On a recent visit to New York, Mr. Friedman, 59, discussed his view of the mortgage industry's direction. Automation will continue to improve, he said, allowing lenders to increase their efficiencies. "This will reduce costs to borrowers and increase profits for lenders," he said.

But systems will only go so far in helping some lenders, he said. Small mortgage banks are likely to shift gears and, instead of offering mainstream products, find niches like Title I lending that they can work profitably, he said.

Midsize operations face the most volatility, Mr. Friedman said. "That's where the action will be. There will be more consolidation, and only the most efficient will survive."

Though mergers will reduce the number of mortgage companies, competition will remain fierce, with more originations by brokers and real estate agents, Mr. Friedman said.

He also said the industry, as it changes, must be careful to maintain its standards.

Banks and thrifts customarily originated predominantly for their own portfolios, an incentive to make sure loans were pristine. Now many loans are intended for sale to Fannie Mae and Freddie Mac, potentially changing the credit approach some mortgage bankers might take.

Credit scoring systems that evaluate mortgage applicants are good tools to help ensure that loans will be repaid, Mr. Friedman said.

But these systems must not be used alone, he said. "It's imperfect. You still need human judgment."

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