SAN DIEGO - While the industry Goliaths continue to absorb the small players in the endless quest for economies of scale, some smaller companies are carving a niche for themselves. Those who run large companies say they see evidence of economies of scale in their large operations. Chief executives of smaller companies say they don't need a $100 billion-plus servicing operation to be profitable. They say they often fill a niche neglected by the larger companies. "We don't need all the market," said Lee Shelton, vice chairman and managing director at Resource Bancshares, Columbia, S.C., "just a piece of it." Resource was servicing $4.6 billion and had originated $1.8 billion as of June 30. Mr. Shelton said Resource will never be a $20 billion servicer, nor does he want it to get that big. While large companies attribute economies of scale to their size, Mr. Shelton said that labor and technology are two factors that can keep costs low. Resource keeps labor costs down because it is in a low-paying area, he said. One industry leader sees the mortgage industry thinning out in the middle as medium-size companies grow, are bought by others, or drop out of the race. Mark L. Korell, group president at Norwest Mortgage, said he expects the few big companies to dominate as medium-size lenders either drop out of the business or are acquired. Small companies will remain abundant, he predicted. "I look at this as a barbell of evolution," Mr. Korell said of his theory. "There will always be room for a mortgage broker or a local originator to exist and do business person to person." While some people will choose to do business locally, most will want the best price and the best service, which is where the large companies have an advantage, Mr. Korell said. Norwest was servicing $100 billion and had originated $12.3 billion as of June 30. Another executive at one of the largest mortgage companies said that he expected further industry consolidation. Larry Swedroe, managing director at Residential Services Corp. of America, the parent company of Prudential Home Mortgage, said that, in time, most of the mortgage business would be controlled by the top 10 companies, as in the credit card industry. He also said size is important for a company if it is to function profitably. "If the small and midsize companies can't make money, they'll go out of the business," Mr. Swedroe said. He expects bank-owned mortgage units to have a strong presence in that top 10 because they already have economies of scale and can cross-sell products to mortgage customers.

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