Twenty-five companies will service 80% of mortgage loans by yearend 2007, according to the Mortgage Bankers Association's latest report on consolidation.

Last year, the association said, the top 25 servicers handled 51% of all loans. The association also predicts that the top 25 servicers will make 82% of new loans in 2007, the association said.

"Banks are driven by the perception that there is more to this than mortgage products. They are trading servicing at extremely high levels, partly because of the draw for the cross-sell," said Donald Lange, MBA president.

"To stay in the mortgage game has become pretty challenging, and many smaller lenders figure 'it's worth more to them than it is to us' and sell their servicing to capture the immediate value."

Mr. Lange said smaller lenders often do not have the capabilities for the hedging required for many loans. He said small lenders are moving toward originations and niche lending because those products are not so easily aggregated.

"There have been no train wrecks on hedging yet, either. Most of the ones that have seemingly figured it out are the major players, and they're getting a lot of help from Wall Street," said Mr. Lange, who is also president and chief operating officer of Torrance, Calif.-based Pacific Financial Services. "The trend (of consolidation) could change if the realization of cross-selling does not appear to be as effective as banks currently think it is."

Douglas Duncan, the mortgage association's director of research, agreed there is no end in sight to banking consolidation, but he contended that the larger players are not necessarily the most successful.

"The most profitable servicers tend to be in the range of 10,000 to 60,000 loans serviced," Mr. Duncan said. "Specialty lenders-like those who do reverse mortgages or construction loans-are the most profitable. They have a higher cost per loan, but they also have a higher profit margin."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.