Norwest Mortgage this month became the first lender to eclipse the $200 billion mark in servicing-and it appears several other bank subsidiaries may soon approach that level.

Just a few years ago, many observers thought a $100 billion portfolio would be impossible to manage. Servicing mortgages involves many things- collecting monthly payments, handling customer service calls, and overseeing default management functions. But it generates fee income for mortgage companies and provides an opportunity to cross-sell financial products.

"Servicing is a very attractive investment," said Michael J. Heid, executive vice president of loan servicing for Norwest Mortgage, a subsidiary of Minneapolis-based Norwest Corp.

Norwest sends out monthly statements to more than two million customers that include sales pitches for other Norwest products.

Other lenders also see servicing as a key business. Six, four of which are divisions of banks, now service at least $100 billion of mortgages. And many large lenders are eager to tack on more loans.

"We have no problem servicing 1.5 million loans," said Michael J. Torke, president of Fleet Mortgage Group. "Our strategy is to put more in there." Fleet already services about $122 billion of mortgages, making its portfolio the fourth-largest.

Mr. Torke said opportunities to increase cross-selling are not limited to the mortgage business. Fleet Mortgage's parent, Boston-based Fleet Financial Group, agreed to buy Advanta Corp.'s credit card business this week, potentially enabling the bank to cross-sell to more than eight million cardholders.

"I think it's important to gain nationwide exposure to a customer base," Mr. Torke said. "All financial institutions could probably do a better job at cross-selling."

Observers said there is no reason why large mortgage servicers won't get even larger. As technology improves, lenders will be able to process a larger volume more efficiently.

"If you can get technology to the point where the technology itself is driving down the costs, I don't know if there are any limits to how big portfolios can be," said Jeff Berg, manager of marketing and communications for Fiserv Orlando, a division of Fiserv Corp. Fiserv sells several loan- servicing software systems to lenders.

Hugh R. Harris, chief operating officer of HomeSide Inc., said its servicing technology can handle as many as four million loans.

As of June 30, HomeSide serviced 1.1 million loans, totaling $91.6 billion. That works out to an average loan size of about $82,000. Four million loans of that size would amount to a servicing portfolio of about $330 billion.

And now that HomeSide is being bought by National Australia Bank, it will have greater access to the capital needed to buy more servicing. In addition, HomeSide will be servicing loans originated by the seven banks National Australia owns around the world.

Consolidation of banks and mortgage companies has helped to create $100 billion-plus megaservicers. Norwest has taken part in the industry's consolidation by buying Prudential Home Mortgage and its $40 billion portfolio.

But Mr. Heid said another reason Norwest's portfolio has grown and will continue to is the tremendous number of loans Norwest Mortgage originates.

"Clearly a strong advantage Norwest has is its strong production presence," Mr. Heid said.

Last year, Norwest originated more than $50 billion of mortgages, and it originated $23 billion in the first six months of 1997.

Still, some industry observers are concerned that the megaservicers are not prepared for the increased prepayments that would occur if interest rates continue to drop. Servicers use financial instruments to hedge against interest rate risk, but these hedges haven't been tested during a refinancing boom, critics maintain.

Lenders say that keeping in touch with their borrowers will play a large part in mitigating this prepayment risk.

"Hedging by itself is just a piece of overall risk management," Mr. Heid said. "Retaining one's customers will have increasing importance in the future."

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