Get big or get out.

Increasingly, that is the hard choice confronting mortgage servicers.

Leading players like General Electric Capital Corp., NationsBank Corp., and Norwest Corp. have been gobbling up smaller mortgage companies and in the process attaining size that would have been unimaginable just a few years ago. Some now process monthly payments on more than $100 billion of loans.

Members of the new breed of megaservicers insist that they are becoming more and more efficient, thanks in part to sophisticated computer and phone equipment. Other servicers, concluding that they are no longer large enough to compete, have left the business.

Just how big is big enough?

"I'm not sure there's a magic number, but it's probably somewhere north of $25 billion and south of $100 billion," says Brenda White, a managing director at UBS Securities.

Right now, only about 20 servicers top $25 billion. In other words, scores of others may have to grow rapidly - either on their own steam or through acquisitions - or face extinction.

Earlier this month, both AmSouth Bancorp. and Wachovia Corp. chose to bow out, selling their servicing businesses to GE Capital. Both said their relatively small size put them at a competitive disadvantage. In February, Keycorp sold its servicing unit to NationsBank.

Servicing, often the most profitable part of mortgage banking, entails funneling monthly payments from homeowners to holders of mortgage-backed securities. Servicers also administer escrow accounts for homeowners' property tax and insurance payments. When necessary, the companies initiate foreclosure proceedings.

Big servicers, experts say, can more easily justify investments in sophisticated computer and telephone equipment.

Most megaservicers, for example, are now set up with "power dialing" phone equipment to rapidly contact delinquent borrowers. The servicers also have computer system that automatically pays taxes and communicates with vendors. Some have been exploring imaging technology, which allows lenders to convert paper documents into digital form.

All of this can translate into big savings.

Countrywide Credit Industries, the nation's largest servicer, says it now spends a little over $50 a year to service each loan in its $120 billion portfolio. When the portfolio stood at $50 billion, the cost was closer to $70 a loan.

Countrywide's goal is to drive the cost down to $45 a loan within two years.

Technology also can bring some less-tangible benefits.

"The computer is not moody and reacts the same every day," says Richard DeLeo, Countrywide's executive vice president for loan administration.

Of course, size does not guarantee efficiency.

"There are big servicers that run sloppy shops, as well as small servicers that run sloppy shops," says Robert Horner, a Chicago-based consultant and former chairman of Citicorp Mortgage Inc.

And even well-run large companies experience some frustrations in the pursuit of ever-lower costs. Most have found that the benefits come in "steps" - that is, the gains in efficiency taper off at certain volume levels and then resume after further growth.

One such leveling off occurs when portfolios reach 150,000 loans, or about $15 billion, says Laura McDonald, a senior manager at KPMG Peat Marwick. At that point, she says, "the servicer has to add a layer of management and infrastructure."

Nonetheless, most big servicers have come to believe that greater and greater savings are still available to them.

"We feel that through a combination of reengineering and technology, there is always a way to bring more out of a servicing platform," says Gary Bettin, a senior vice president at NationsBanc Mortgage.

That unit, based in Dallas, has ballooned its servicing portfolio to $75 billion from $28 billion a year ago, largely through acquisitions. Now, to become more efficient, the company is planning to combine its three separate servicing centers into one, Mr. Bettin said.

Though such a consolidation might seem a natural way to reap savings, some megaservicers have decided to operate multiple sites. Norwest Corp.'s mortgage unit, which services about $100 billion of loans, runs no fewer than seven separate servicing facilities.

With this arrangement, homeowners can do business with a servicing center close to their homes, says Richard Malloy, an executive vice president at Norwest Mortgage. In turn, closer ties with customers can help promote cross-selling of other products.

Furthermore, Norwest has electronically connected four of the facilities, creating what it calls a "virtual servicing center."

PNC Bank Corp., which jumped to the servicing major leagues in 1993 by purchasing Sears Mortgage Co., has decided to go with four servicing sites.

"I don't think seven to 10 servicing locations are efficient," said Pete Begg, an executive vice president at PNC Mortgage. Fewer sites, he said, "gives maximum flexibility," allowing the servicer to "absorb some things without worrying about technology limitations."

Even small servicers can increase their efficiency by growing, because they can often take on more loans with only minor additions to staff.

For example, servicers with portfolios of less than $250 million spend $91 a year on personnel costs for each loan, according to the Mortgage Bankers Association of America. But with portfolios of $4 billion or more, the personnel expenses drop to $36.

Though industrywide data on bigger servicers is hard to come by, most giants say they have experienced significant savings with growth.

At Prudential Home Mortgage, which services some $76 billion of loans, costs per loan have declined about 20% over the past 15 months, says Richard Thornberry, a managing director. He credits the improvement to growth, technology, and process changes.

In a departure from the trend of giants acquiring small players, Prudential Home is now on the auction block, as its parent strives for a stronger capital position. If another megaservicer buys the company, the combination could provide a vivid test of the advantages of being large.

"We are certain there are economies of scale," says Doug Duncan, a senior economist with the Mortgage Bankers Association. "But we are not certain where the economies end."

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