There's no guarantee of mega-profits on the mega- portfolios of mortgage servicing rights created by recent bank merger deals, experts say.
As servicing portfolios have ballooned in recent years, with the biggest crossing the $200 billion mark, banks have already squeezed out most of the cost savings that scale brings.
At roughly $209 billion, the combined servicing portfolio of BankAmerica and NationsBank would be the nation's largest, based on yearend numbers. Norwest Mortgage would rank second. It serviced almost $206 billion in home loans at yearend.
At these big banks, computers do what a legion of employees once did. Computers mail monthly mortgage bills, keep track of hundreds of thousands of payments, and even predict which late-paying homeowners are behind because they are absentminded and which ones may be in financial trouble. The latter are worth the expense of a friendly phone call from a bank employee. Banks then funnel the payments to investors.
Laura McDonald, senior manager of the mortgage and structured finance group at KPMG Peat Marwick, said the big players are "pretty much hitting the bottom in taking costs out of the equation."
If banks slash servicing costs more, they risk losing customers, said Dave Imig, senior vice president of loan servicing at Washington Mutual Inc.-another institution whose latest deals would make it one of the top five servicers.
To increase profits, banks will have to increase the revenues they bring in from each mortgage customer, Mr. Imig and others said. They can do that by selling their mortgage customers other bank products, such as checking accounts, mutual funds, and credit cards, but that process won't be easy.
Banks face the same challenges in cross-selling mortgage customers that they do in other business lines. They have mountains of information about their customers, but they do not know how to use it, Ms. McDonald said.
Banks have a very complete financial picture of their mortgage customers. They know the customers' income and assets, and they can deduce where the customers are in the financial life cycle-big borrowers for home improvements and raising a family or savers for retirement and college tuitions.
But most banks are only now beginning to extract information from the mortgage servicing data base to build a marketing data base that other units of the bank can tap into, Ms. McDonald said.
They are also only in the early stages of figuring out which financial and demographic facts are the most predictive and what they tell, she said.
The new BankAmerica mortgage unit will also need to mine customer information to make sure it doesn't lose customers to competing mortgage lenders. Together, BankAmerica and NationsBank originated $31 billion in home loans in 1997-not enough to replenish the loans all mortgage lenders routinely lose to competitors when customers refinance or move.
Big servicers typically like annual originations to equal at least 20% of their servicing portfolio. At the new BankAmerica, annual originations would be closer to 15%.
The heft of the megabank servicing portfolios still brings some advantages.
"You just totally expanded your opportunities for going after additional mortgage customers," Ms. McDonald said, noting that all customers who do not have mortgages with the bank would be fair game.
In addition, a new round of technology investments to mine customer data would be easier for the megabanks, she said.