Conventional wisdom says that mortgage servicing is purely a scale business. A close look at results tells a different story.

"It's more complex than that," said Frank Terzuoli, senior manager at Arthur Andersen Business Consulting, San Francisco.

Big players have continued to grab for market share, gobbling up servicing portfolios and competitors largely on the theory that adding new accounts will boost profitability because costs remain fixed.

Andersen's client work suggests, however, that technology investment may have more effect than size does on the profitability of administering mortgage loans.

"That is not to say if you just increase size, all other things being equal, you will not see benefits; you will. They just won't be as great," Mr. Terzuoli said.

Companies tend to be more profitable after a big acquisition, but "after a couple of years the benefits start diluting," Mr. Terzuoli noted. "In the beginning people tend to be willing to accept a higher work load," he said. After that, he said, companies must make more acquisitions or invest in computer systems to maintain profitability.

At the Mortgage Bankers Association's financial analysis conference in Chicago last week, Mr. Terzuoli presented data on costs per business function that suggested economies of scale aren't quite what everyone assumes.

They showed that costs per loan was only moderately lower for bigger companies' tax, insurance, and escrow account tasks. More surprisingly, they showed that per-loan costs were higher at the biggest companies for delinquency, foreclosure, and bad loan work.

An investment in predictive software, which helps a company focus its collection efforts, can build profitability in these areas, he said.

Other speakers said that costs can indeed rise as a company builds share-for example, when a company buys a portfolio of loans outside its geographic region and has to open new servicing facilities.

"I think there are a lot of entrepreneurs who can outthink and outhustle the bigger ones," added Jiri Nechieba, president and chief executive officer of Interlinq Software Corp., in a presentation on the use of technology to identify profitable portfolios.

The MBA's annual cost analysis for the industry shows midsize companies- those with portfolios between $4 billion and $19.9 billion-to be more profitable than the companies with larger servicing portfolios.

But Douglas Duncan, senior economist for the MBA, said 1995 figures show the bigger companies' servicing profitability-when loan origination losses were left out of the equation-was "what you might expect." A more thorough analysis of 1996 profitability is under way, he said.

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