Small Servicers Still Find Profitable Niche Markets.(mortgage loans)(Brief Article)

The nation's biggest lenders are banking on economies of scale to make them the envy of the industry, but the data continues to show that smaller loan servicers match up well in terms of profitability, according to the chief economist of the Mortgage Bankers Association of America.

Douglas Duncan said that by focusing on niches such as Ginnie Mae servicing, smaller servicers have been able to outperform their larger rivals by some performance measures, even as the mega-servicers use scale to drive down the cost of servicing per loan.

"It is not true as a tautology that the lowest cost servicer is the most profitable," he said at the MBA's National Mortgage Servicing Conference in San Antonio. "The largest guys are not the most profitable at the end of the day."

Size is not necessarily destiny in the servicing business, he said. For instance, government-guaranteed loans, with their higher delinquency rates and relatively modest cross-sell potential, may not lend themselves to advantages of scale as readily as Fannie Mae and Freddie Mac loans.

Even so, Mr. Duncan noted that scale-related opportunities do exist in the servicing business. And the mid-sized lenders, particularly those servicing portfolios of 175,000 to 350,000 loans, get caught in a squeeze.

The mid-sized players have higher servicing costs than the mega-servicers, but they do not achieve as much revenue as either their smaller or larger counterparts. That may show why some mid-sized players have exited the servicing side of the mortgage business altogether.

Larger lenders do service loans more cheaply than lenders with small portfolios, but Mr. Duncan said the MBA's cost of servicing study shows that the cost curve ...