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Top Five Going at Warp Speed

In case you missed one of the recent tabulations we published, let me tell you the industry's quiet little secret: the nation's top five servicers, as a group, control almost 67% of all outstanding mortgages in this nation. If that's not power, nothing is.

Twenty years ago a mortgage banking executive would be doing cartwheels if he had a 5% share. But that was then. Thanks to the credit crisis and protecting the concept of "Too Big to Fail," the consolidation of mortgage servicing firms has been on warp speed the past year. Gone are former mega-servicers the likes of IndyMac (failed), Washington Mutual (also failed) and Wachovia (would've failed). Then there's Residential Capital Corp. ($365 billion in receivables and a market share of 3.81% according to the Quarterly Data Report), which is a candidate for failure and (even worse) it's owned by General Motors (which could fail) and Cerberus Capital, which should be shot in the head for some of its crimes against investors. (Who are the poor suckers that ponied up for the fund that bought Chrysler?)

It's a shame, really. ResCap's GMAC Mortgage unit was once a well-managed lender/servicer that also had a nice little side business in subservicing. It's hard to tell what exactly GMAC is doing in relation to subservicing because its senior executive in charge of that effort, Tom Donatacci, recently departed for greener pastures.

Chances are, one of these days a mega-bank will swoop in and buy GMAC's servicing portfolio, further adding to the industry's cartel. Stated simply: never before have so few controlled so much in the way of the nation's residential mortgages.

And what's wrong with the big 5 owning the industry? Answer: nothing as long as we all agree in monopolies and the government bailing out institutions that are so big their financial tentacles wrap around other businesses and Uncle Sam is forced to bail them out because it would cause too much economic pain.

According to National Mortgage News and the Quarterly Data Report, Bank of America services $2 trillion in loans, giving it a market share of 21.45%. Wells Fargo is second with $1.78 trillion and 18.58% market share. Third up is Chase ($1.5 trillion/market share: 15.68%).

Now, that's not to say any of these "Big Three," which together control 55% of all home mortgages, are candidates to fail. But what if they did? Think of all those consumers whose loans might, potentially, not get serviced.

Of course, that's a worst-case scenario. Someone would step in and service those loans, right? I guess, but maybe it's time for the government to prevent "Too Big to Fail" from ever happening in the mortgage business.

In the deposit space, there is a federal national cap on how much of the nation's deposits can be held by one bank. The limit is 10%. Shouldn't the same cap apply to housing receivables?

Maybe a 10% cap might smack of socialism but isn't deposit insurance socialism, too? And what about the $700 billion bailout and the rescue of AIG and Bear Stearns? Think about it while I have a cup of tea.