Has Consolidation Stalled?

The long held belief that the residential servicing market will continue to consolidate is being tested these days.

Few in the industry think the servicing side of the business will actually "deconsolidate," but figures compiled by this newspaper show that - for now at least - consolidation is taking a small vacation.

According to third-quarter data compiled by Mortgage Servicing News, the top 10 servicers, as a group, control 51.52% of all the outstanding housing receivables in the U.S.

Rest assured 51.52% is a huge number, but the grip of the top 10 has actually skidded during most of 2002. In the first and second quarters, the top 10 controlled, respectively, 53.74%, and 53.11% of all outstanding residential loans. (See table.)

The decline in the combined market share of the top 10 (as well as the top five) is negligible, but notable.

The reason for the respite in consolidation is no mystery: the refinancing boom of the past two years has wreaked havoc on the buying and selling of "bulk" mortgage servicing rights.

Servicing brokers also have reported difficulties selling not just portfolios, but franchises. "How can you sell something that may not exist in a few months," said a servicing manager based on the East Coast.

One investment banker recently lamented that not one firm among the top 20 even seems open to the idea of selling now. "Everyone you talk to seems really committed to this business right now," he said.

Of course, servicing consolidation could very well pick up where it left off - but only if interest rates begin to rise, and soon.

However, most mortgage and housing economists think that over the short term, mortgage rates are likely to stay at about where they are now: 6% for a 30-year conventional FRM. And many anticipate that mortgage rates will still be under 7% a year from now. (In November, the Federal Reserve cut short-term rates by 50 basis points, a move that may keep mortgage rates down, at least for a while.)

The refi boom has made it difficult for servicers of all sizes to hold onto to their current customers.

Several publicly-traded firms have announced large servicing "impairment" charges, but have continued to post stellar earnings either because they are writing so many loans on the front end or have actively hedged their portfolios.

Also, some of the smaller- to medium-sized correspondent lenders reportedly have been keeping their servicing rights instead of selling "servicing-released." These firms are betting that when rates do rise, they'll receive a better bid for the servicing "strip."

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