Servicing to Drive Future Profits.(mortgage lending industry)(Brief Article)

The big are going to get bigger, but it's not just a matter of economies of scale, according to Morgan Stanley analyst Kenneth Posner.

Rather, he believes that "best in class" loan origination and loan servicing costs rather than scale are the mark of potential mega- lenders. And over time, loan servicing rather than origination will emerge as the primary driver of profits, according to Mr. Posner's recent report on the future of the mortgage industry.

"A hedgehog-like focus on origination and servicing functions will be the key to success," the report said.

For those best-in-class lenders that stay in the business, servicing will be the most important profit driver for banks and thrifts, according to Mr. Posner.

"Within the depository sector ... we expect to see a small number of mega-lenders continue to carve out dominant, national franchises," the report said.

And, interestingly, the analysts at Morgan Stanley expect more thrifts and banks to exit the mortgage sector, while some of the biggest "prime" credit lenders extend their dominance to the subprime sector.

Contenders are Golden West, Countrywide Credit Industries, IndyMac and Washington Mutual, according to Mr. Posner's report,