Big banks' apparently keen interest in GE Capital's mortgage banking operation suggests that consolidation in mortgage servicing is heading into a new phase.

Citicorp has emerged as the leading candidate to buy GE Capital Mortgage Services, sources said. And Chase Manhattan Corp. has also been mentioned as a potential buyer, along with at least six other companies.

The appearance of Citicorp and Chase at the table suggests that the larger servicers are eager to build their portfolios even though refinancings have cut into the value of loan servicing.

Most of the consolidation in the servicing market last year came from midsize mortgage players, namely thrifts and independent lenders, buying other midsize companies to gain greater economies of scale.

The one exception was National Australia Bank's deal to buy HomeSide Inc. In that deal, still pending, National Australia was seeking entree into the U.S. mortgage market.

Now the big banks' quest to expand consumer relationships will drive dealmaking, possibly threatening the existence of smaller players.

"The bigger servicers will continue to get bigger. The large companies have been feeling successful about replacing runoff in this refi boom," said Laura McDonald, senior manager of the mortgage and structured finance group of KPMG Peat Marwick LLP.

Citicorp, which has a portfolio of about $40 billion, would gain some economies of scale with a purchase of a $100 billion portfolio such as GE's.

More importantly, the New York money-center would gain more than a million new customers.

Bold moves for mortgage customers would echo a trend that has already started in the credit card sector.

Indeed, Citicorp last month inked a deal to buy the AT&T Universal card portfolio. Last year Fleet Financial Group agreed to purchase Advanta's credit card portfolio and Banc One Corp. bought First USA Inc.

A spate of bank mergers and acquisitions of independent mortgage companies this decade has already contributed to an increased concentration of servicing among a select few.

In 1989, the 25 largest servicers had a market share of about 17%. Now, the top four servicers alone have a 17% market share.

E. Gareth Plank, an analyst with UBS Securities, said advances in technology as well as greater access to capital for lenders should fuel even more acquisitions by the largest mortgage servicers.

Within the next three to five years, he said, the top five servicers could control 50% of the servicing market.

Large servicers are consolidating the production side of the business as well, said Ms. McDonald.

As a result, megaservicers aren't afraid to add on more loans-even in a low-rate environment.

Ms. McDonald said servicers ranked 50th to 80th will probably be under the most pressure to reevaluate whether they should remain in the business.

These companies have portfolios ranging from about $5 billion to $10 billion so they may be too big to be a niche player and too small to compete with the megaservicers.

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