FEATURE/1997 Alert: major structural change in mortgage banking predicts Towers Perrin Consulting Group

Business Wire, Dec 26, 1996

NEW YORK--(BUSINESS WIRE FEATURES)--Dec. 26, 1996--In 1997, significant consolidation in the $3.3 trillion mortgage banking industry will change the nature of competition in both servicing and originations, say Towers Perrin consultants to financial institutions.

"In servicing, one of the top ten and maybe even one of the top five houses will be purchased in 1997," said David M. Partridge, director of the firm's financial institutions practice. "While three years ago, no institution topped $100 billion in servicing, it's likely that 1997 will bring a $200 billion mortgage servicer," he said. Through the first half of the year, the top players will pay record premiums for loan servicing in their race to reach the magical $200 billion mark, predicted the consultants.

In addition to consolidation at the top end of the industry, Towers Perrin expects that as many as 20% of the institutions currently engaged in mortgage servicing will exit or sell the business next year, consolidating $500 billion of servicing rights among the larger players. For many depository institutions, this business is only marginally profitable, and one that provides little or no competitive advantage while creating efficiency ratio problems," commented Partridge.

The situation is similar on the origination side of the business. Comments Paul T. Johnson, a consultant in Towers Perrin's Los Angeles office, "We see dramatic numbers of institutions -- anywhere from 10% to 20% -- getting out of mortgage origination. These institutions, concentrated primarily in the $500 million to $20 billion asset range, will either private label through a third party provider, or close down their operations entirely," said Johnson.

Major investments in technology are required to continue as a competitive provider in mortgage originations, Johnson noted. "In addition, real estate brokers are now openly demanding payments for referrals, adding 10 to 15 basis points on what is already a very expensive process," Johnson noted. "For institutions that are providing mortgage origination as a low-margin accommodation to their customers, these additional costs are back-breakers."

Why in 1997? "We don't expect rates to drop the 100 - 150 basis points that would be required to trigger a refinance boom in the coming year," said Johnson. "As a result, there is not enough incremental volume in the pipeline to keep all marginal players in business." In the future, Towers Perrin consultants see two tiers of vertically integrated mortgage originators: on one hand, the "enormous" originators, such as Norwest, Chase and the HFS/PHH combination and, on the other hand, those community institutions that need mortgages as assets on their balance sheet.

The consultants made one additional cautionary note. "If rates do drop enough to initiate another wave of refinancings, it will put some of the major mortgage banking houses at significant risk," comments Partridge. "They would need to write off servicing acquired right (SAR) premiums in such massive amounts that it could be the end of a top five player," he said.

Towers Perrin is an international firm of management consultants with a staff of about 5,500 in 81 offices. The firm currently serves almost 600 financial institutions on five continents, including more than three-fourths of all FORTUNE-ranked banks, savings institutions and diversified financial services companies.

CONTACT: Bliss, Gouverneur & Associates, New York

Patricia S. Coate, 212/840-1661