The Industry's Dilemma: Over-Capacity When Refinancing Slows Down.

Two of the most frequent complaints I hear about mortgage banking is that it's a tight-margined business and that there is too much "over-capacity" in the industry.

Says who? Well, plenty of folks: Wall Street investment bankers, analysts, top executives and so-called consultants who are peddling their "expertise" and second-rate data.

I could name names but most of you know who you are and to a certain degree you're right: there is too much capacity in the industry. How much though, I couldn't tell you, not in a million years.

When originations boom - as they are now - I'm sure there are plenty of lenders out there who will tell you that they don't have enough capacity. And next year when rates rise (I'm assuming that a recovery is in the works and that the Fed will tighten but I've been wrong before) you will see plenty of folks move to cut capacity.

A word that is synonymous with capacity - at least in this industry - is the word "competition." The belief, at least on that Mt. Olympus known as Wall Street, is that if there was less competition, the surviving companies would enjoy nice profit margins. And life would be beautiful, at least for those lucky few. They would be able to print money and their shareholders would benefit from astounding share price appreciation and robust dividend growth. Yes, life would be grand.

Yes, mortgage companies, their managers and owners have lived with over-capacity for, what, a decade now? I got news for you though: even if there were only five mortgage lenders and servicers left in the U.S. you'd hear the same old line: too much capacity. You'd hear it from Wall Street and you'd hear it from the five lucky survivors.

From the consumer activists you'd hear this: there is not enough competition among lenders. Of course, for consumer activists, the mortgage industry is a favorite punching bag. I'm ...