By Mozilo, Angelo R.
Mortgage Banking , Vol. 63, No. 9
TWO YEARS AGO, I SUGGESTED THAT AT the then-current rate of consolidation, the top five mortgage industry players would dominate the market, representing 50 percent to 60 percent of market share. In addition, I stated Countrywide Financial Corporation's goal to be the leader of that group.
It appears what I suggested is becoming the reality. Today the top five companies have about 40 percent of the market share in both originations and servicing. Naturally, I'm especially proud of Countrywide's growth. In the first quarter of this year, Countrywide garnered more than 12 percent of the origination market and production exceeded prepayments by $50 billion, driving our servicing portfolio to more than $500 billion as we closed in on our goal of being No. 1.
While consolidation continues in both origination and servicing, technology has enabled some deconsolidation of loan production. It has become easier for small companies and financial services firms that had not previously participated in the mortgage industry to originate, or at least serve as sourcers of, home loans.
I also believe the unnecessarily long and complex mortgage process and a prevalent reliance upon credit scoring in underwriting systems lend to the deconsolidation trend in production. Fearing the perceived difficulty of the process and the potential for rejection, some mortgage applicants trust that a smaller originator will give them more help through the paperwork and increase their probability of approval.
Further adding to the fragmentation of loan production is the movement to bundle real estate transactions. Combining segment expertise from providers such as real estate agents, builders, loan-closing services and mortgage originators serves home-buying customers and homeowners who are increasingly embracing the one-stop shop concept in their residential real estate transactions.
For these reasons, deconsolidation of the mortgage production market among smaller originators will continue, even as the largest lenders build a majority aggregate market share. On the other hand, because economies of scale are so important in the servicing market and many companies have chosen to exit this aspect of our business, the loans originated by small and midsized players typically end up in the hands of the largest servicers. I now believe that the five largest servicers will hold 70 percent of all mortgages by the end of this decade.
Profiting in a changing landscape
What do these trends mean for the mortgage industry? As always, it means opportunities and challenges for firms of all sizes.
At firms without the economies of scale enjoyed by large lenders, consolidation, shrinking margins, gain-on-sale accounting, accelerated prepayment rates and pressure to leverage existing customer relationships combine to pose a significant challenge to growth and profitability. An excellent way for small and midsized firms to turn these challenges into opportunities and to stay competitive is to form strategic alliances with one of the large originators and servicers.
For large lenders like Countrywide, the opportunities represented by strategic alliance are obvious. Having already built highly efficient, cost-effective operations, taking on the role as a fee-for-service outsourcer for originations and servicing requires very little, if any, investment. In addition, large lenders are positioned to go beyond traditional outsourcing to form joint ventures, creating new mortgage companies in which ownership is shared by the large lender and a venture partner such as real estate brokers, home builders and others.
The case for traditional outsourcing
Why choose to outsource sales and servicing? The following are some of the solid business reasons that make outsourcing an excellent management tool:
* Fixed expenses, especially those associated with back-office operational and front-office "customer-facing" activities can turn into scalable, variable costs. …