The axiom that size matters in the mortgage servicing business is only partly true, a recent study found.

Midsize companies struggle, the Mortgage Bankers Association found, but small niche players compete profitably with the giants.

The study also found that the use of a subservicer can boost profitability in a servicing business.

The trade group released the survey, based on 1996 data, last week at its national servicing conference.

Larger servicers were found to be the most productive.

Those with more than $20 billion in their portfolios averaged 1,168 loans serviced per employee.

But productivity did not necessarily translate into profitability.

At companies that serviced more than 900 loans per employee, the net operating margin in the servicing business averaged 34%.

For those servicing only 500 to 699 loans per employee, the figure was 52%.

However, margins for the entire mortgage operations for these smaller companies were only 4.6%, compared with 11.6% for the larger mortgage banks.

Midsize companies struggled the most. Companies that serviced 700 to 899 loans per employee had servicing margins of only 16.2%.

Douglas G. Duncan, senior economist of the MBA, said it remained to be seen whether the smaller companies' servicing margins would remain so high, because several of them specialize in loans to consumers with poor credit.

And Mr. Duncan did not discount size.

He predicted that the 1997 study will show improved margins for the larger servicers, because several of them, such as Norwest Mortgage, Chase Manhattan Mortgage, and HomeSide, completed the consolidation of servicing they acquired in 1996.

That year Norwest Mortgage bought more than $40 billion of servicing from Prudential Home Mortgage, Chase Manhattan Corp. merged with Chemical Banking Corp. and created a $100 billion-plus servicer, and BankBoston Mortgage and Barnett Mortgage combined their portfolios to form HomeSide.

And more consolidation is expected.

Several people at the conference predicted a repeat scenario of 1994 once this refinance boom ends.

That year many independent mortgage companies were acquired by banks and thrifts as a decline in demand for refinances left some lenders overstaffed and losing money.

Another upshot of industry consolidation is an increased interest in mortgage subservicing, a form of outsourcing. Subservicers are paid to service loans but do not own the servicing rights.

The MBA study found that servicers that use subservicers are the most profitable, averaging margins of 47% in their servicing businesses.

Pure subservicers came next, at 36.1%, followed by companies working both ends of the business-acting as subservicers as well as having some of their own portfolio subserviced-at 30.5%.

Servicers with no subservicing relationships had the lowest such margins.

Banks have increasingly viewed subservicing as an attractive way to use the capacity in their servicing operations. Banc One and Norwest, the largest servicer, have been bidding aggressively for subservicing business.

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