Mortgage Servicing's Future: Big for Capital-Rich Banks Looking for Assets

American Banker, August 18, 1997 | Go to article overview

Mortgage Servicing's Future: Big for Capital-Rich Banks Looking for Assets


The big servicers will get bigger, the small will survive and many mid-sized providers-thanks to sharpened strategies and cost performance will remain in the game.

Today, the mortgage servicing business is a healthy environment for commercial and mortgage banks. For starters, mortgage servicing is highly attractive to capital-rich banks clamoring for assets, according to Brenda B. White, managing director of UBS Securities, based in New York City.

Even so, as the industry consolidates, the future of mortgage servicing is destined for further change. Players in the mortgage banking industry continue to engage in debate as to whether it's still profitable to service mortgage loans and the ultimate ownership structure of mortgage servicing.

In its annual mortgage servicing performance study, KPMG Peat Marwick LLP found that higher profitability was a result of portfolio characteristics, not size. KPMG's MorServ study focuses on single-family mortgage servicing data that includes both quantitative and qualitative information. The study analyzes factors such as portfolio characteristics, use of technology, management structure, and compensation structure against the profitability of the servicers to identify best practices within the industry.

According to preliminary statistics in the Mortgage Bankers Association of America's 1996 Cost Study, the direct cost to service mortgage portfolios up to $250 million is $209 per loan; $142 per loan for portfolios ranging from $250 million to $1 billion; $101 per loan for portfolios of $1 to $4 billion; $85 per loan for portfolios ranging from $4 to $20 billion; and $82 per loan for portfolios greater than $20 billion. The industry average direct cost to service is $86 per loan.

what the future holds

Some sources argue that economies of scale achieved by mega servicers will so dominate the market that small- and mid-sized lenders will be squeezed out. Others contend that servicers of all sizes will survive well into the future. The question of mortgage servicing's future was put to several industry experts for their "crystal ball" prognostications-and their answers are telling.

Industry experts interviewed reached near consensus on their predictions for the over-$20 billion portfolio servicer group: Giant lenders will continue to grow at a rate faster than small- and mid-sized lenders. "Large servicers get huge economies of scale, so servicing will gravitate toward the large (players)," says James M. Cosman, director of mortgage banking, BankBoston.

Cosman isn't alone in his thinking. Michael A. Hyman, senior vice president of Wendover Funding, Inc., an $11 billion subservicer located in Greensboro, NC, agrees, adding that the cost efficiencies of large servicers coupled with the fact that technology is driving the growth of the industry support this argument. "The mega-servicers will maximize their cost efficiencies," he says.

Walter C. Klein, Jr., CEO of First Nationwide Mortgage Corp., a top ten, $65 billion servicer based in Frederick, MD (a subsidiary of California Federal Bank), points to large lender retail origination strategies, arguing that most large lenders, with a few notable exceptions, have ceded the retail origination channel to local banks, mortgage companies and realtor joint ventures.

That aside, some experts are forecasting big changes within this group. Douglas Duncan, senior economist, Mortgage Bankers Association of America, predicts dynamic changes in ownership structure among the top 25 companies. The most striking change, says Ross M. Strickland, executive vice president of $6 billion Webster Bank, CT, is what he predicts will be a driving consolidation to only five or six mega-servicers.

Experts are split on the small servicer group, defined as having portfolios under $1 billion. Community banker Randolph P. Snow, senior vice president of $417 million-asset Bank of Newport, RI, is bullish about the opportunities for small servicers in the future. …

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