NEW YORK - Mortgage servicing has always been the least glamorous part of the home loan industry. So maybe it's fitting that just as mortgage producers are basking in the glow of record refinancings, servicers are slogging through some of their grimmest days ever.

"It's out of vogue to be a servicer right now," sighs Kevin Race, chief financial officer of Fleet Mortgage Group, the nation's second-largest mortgage servicer.

The top servicers - a mix of banks, thrifts, and independent. mortgage companies - are certainly getting plenty of new loans to handle. The problem is, large portions of their existing borrowers are refinancing with other lenders.

Tough Sledding

That makes growth hard to come by, and in some cases it has meant big hits to earnings.

But the servicers are hardly giving up. In fact, some are managing to post extraordinary increases in their businesses, according to an annual survey by American Banker. (A ranking of the top 100 residential mortgage servicers begins on page 14.)

Countrywide Credit Industries, the nation's largest servicer, was processing monthly payments on some $62.6 billion of mortgages at the end of June, up 83% from a year earlier.

By the end of September, the holdings had climbed to more than $70 billion. And, within five years, the California company expects to hit a staggering $200 billion.

A Profit Center

Though seemingly a mundane, back-office function, servicing is often the most profitable part of mortgage banking.

A fee-based activity, it entails funneling monthly payments from homeowners to holders of mortgage-backed securities. Servicers also administer escrow accounts for property taxes and insurance.

The refinancing boom has been the hardest on servicers that have been in the business for a long time. When the boom hit, these players were servicing many older loans with high interest rates - sometimes over 10%. Those loans were among the first to refinance.

Shrinkage at No. 5

Source One Mortgage Services Corp., the fifth-biggest servicer in the country, saw its portfolio shrink by .9% in the year through 30% - even though its originations are running at 10 times the level of a few years ago.

"For people who have been large servicers over extended periods of time, this has been a difficult situation," says James Conrad, chief executive of the Farmington Hills, Mich., company.

In the past, many big servicers fed their portfolios by acquiring servicing rights in bulk from other players. But lately, with servicers still jittery about loan prepayments, the market for such packages has been eerily quiet.

"The bidding process has died," says an executive at a once aggressive buyer of portfolios.

Sizable Writedowns

The fear is that the acquisitions of today will simply become the writedowns of tomorrow. Leading servicers like Fleet, Citicorp, and Margaretten Financial Corp. already have taken sizable writedowns on servicing assets as record numbers of homeowners have refinanced.

Instead of bulk purchases, servicers have been relying on their own originations - writing loans and selling them into the secondary market.

In addition, they have shown increased appetite for flow" purchases - routinely buying new servicing rights from other lenders. Since these rights are tied to mortgages with current interest rates, the loans are less likely than older ones to prepay.

Countrywide, which is also the nation's largest originator, figures its servicing portfolio will hit the $100 billion mark next year.

Scale Economies Sought

What's the point of getting so big? Economies of scale.

"When you're a whale, the incremental costs of adding loans are much less than when you're a minnow," says David Loeb, Countrywide's chairman.

Among other things, big servicers can better justify investments in new technology, says Robert Williams, a managing director of Prudential Home Mortgage Corp., the No. 3 servicer.

Sophisticated new phone equipment, for example, can help servicers handle homeowner inquiries efficiently. Likewise, the equipment lets servicers reach delinquent borrowers with stunning speed and persistence.

No One's Walking Away

Certainly, no giant servicers are walking away from the business just because of the vexations brought on by the refinancing boom.

"Longer term, servicing is the more stable part of the business," says Mr. Race of Fleet. "It's also where the real consolidation in this business is going to occur."

Adds Mr. Williams: "I view the whole refinancing thing as a big game of musical chairs. When the music stops, you want to have chair." With a servicing portfolio that is expected to hit $100 billion by late next year, Prudential should be seated quite comfortably. w

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