Is Big Always Better?

Mortgage Banking, August 1992 | Go to article overview
Save to active project

Is Big Always Better?

Taking on conventional wisdom, Coopers & Lybrand took apart some data from GNMA servicers and found big is not always better. Furthermore, geographic diversity is not always the plus it's cracked up to be.

In business, is big really better? And what about the popular diversification advice to avoid putting all your eggs in one basket? After all, even Mark Twain cautioned us "to put all our eggs in one basket, but watch them."

Even though conventional wisdom today is clearly stacked on the side of growth through mergers and acquisitions, and diversification is a commonly sought strategic goal for many, we think it's critical to question whether these strategies are everything they are cracked up to be.

On one side of the growth and diversification issue are the financial and economic professionals who argue quantitatively that the soundest and least risky strategy for business management is through growth and diversification. On the other side of the same issue are the business policy analysts who argue qualitatively that undisciplined growth and diversification strategies may result in a reduced focus on business advantages and objectives, negating any of the presumed quantitative gains that the "number crunchers" claim to result from growth and diversification.

How relevant is this issue? It is hard to think of any corporate body holding a strategic planning session today that would not discuss the issue of growth and/or diversification. Much federal decision-making is molded by the attitudes policymakers have on growth and diversification, including such things as banking policy, antitrust law, and even how the savings and loan debacle will be resolved.

Consolidation and geographic diversification have received increased attention in many sectors of our economy for reasons that stretch from the simple desire to improve efficiency and lower risk to the need to diversify as the only means for survival. Consider the recent spate of large bank mergers. In the end, it is the American consumer who either gains or loses from the success or failure of these strategic decisions or policies.

To test the practical results of these strategic policy tenets in the context of the mortgage banking industry, we assessed the relative performance of servicers of mortgages backing Ginnie Mae mortgage-backed securities. Some of these servicers were large and diversified and some were small and market-concentrated. Using standardized information from 362 mortgage banking firms that submit the status of their loan portfolios to the Government National Mortgage Association (GNMA), the Risk Analysis Group of Coopers & Lybrand (C&L) set out to evaluate the effects of grows and diversification in the industry. This article discusses the results of that analysis.

Purpose and framework of the analysis

Since January 1990, the C&L Risk Analysis Group has supported GNMA in its efforts to monitor and address risk proactively. The basis of much of the group's risk analysis comes from the aggregation, segregation and synthesis of more than 7 million home mortgage computer records submitted quarterly to GNMA by servicers of GNMA single-family loan portfolios.

Conventional wisdom asserts that:

* Increased geographical diversification lowers the risk of business failure by reducing regional dependency; and

* Growth leads to increased efficiencies through economies of scale, which, in turn, improve competitive advantage.

The Risk Analysis Group decided to test this conventional wisdom by analyzing the loan portfolios of both large and small mortgage institutions with different levels of regional diversification. For the particular analysis discussed here, the Risk Analysis Group looked at the 362 active, non-defaulted institutions, each having GNMA loan portfolios containing more than 1,000 federally guaranteed home loans. The total loan sample studied represents more than 7 million loans and more than $396 billion in outstanding principal.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Is Big Always Better?


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?