'A Place in the Sun' for Residential Servicers?

First, the good news: If your firm was smart/lucky enough to hold onto its mortgage servicing rights (and smart enough to successfully hedge this 'wild and crazy' asset), you are already benefiting from positive cash flow as refinancings dwindle and hedging costs dissipate.

Yes, mortgage banking is a viciously cyclical business, a business that benefits lenders when production booms and makes servicers cringe when receivables disappear out the back door via refis.

Servicers have been in the wilderness since 2001, a year in which production almost doubled from the prior period. Since then, the origination market has been on a roll thanks to historically low mortgage rates and a red-hot housing market. Between 2002 and 2005, residential lenders funded an eye popping $12.3 trillion in loans and today consumers owe roughly $8.1 trillion on their homes.

As I write this in late January, it looks as though industry production will fall by about 24% this year to $2.2 trillion. In case you're wondering, that's the bad news - bad news if your profit center is production and you tossed your servicing rights overboard many moons ago or never serviced loans in the first place.

It stands to reason that firms with the highest dollar amount of receivables will benefit the most. According to the Quarterly Data Report, the nation's top five servicers are Countrywide Home Loans ($1 trillion in receivables), followed by Wells Fargo Home Mortgage ($954 billion), Washington Mutual ($742 billion), Chase Home Finance ($587 billion) and CitiMortgage ($386 billion).

These five firms, as a group, control 45% of the market. Servicers ranked six through 10 control just 14% of the market. (Again, all of these figures are courtesy of the Quarterly Data Report, and the Mortgage Industry Directory.)

As the mortgage cycle turns to favor servicers, what will those firms outside of the top five do? It's unlikely that any of the top five servicers will merge but it's always possible that Nos. 6 to 10 might combine forces.