The mortgage industry has consolidated over the years and more consolidation is ahead as rising interest rates trigger a shrinking refinance business that forces out some companies, especially those that aren’t diversified. Even so, the industry will still be fairly fragmented.

The reason for the consolidation is simple: More companies will decide it’s time to sell after the refinancing business drops off, said Vicki Wagner, credit analyst at Standard and Poors. That will be especially true among companies that don’t service loans or have other sources of revenue.

“Most companies tend to rethink whether they want to stay in the business, given the lower production and lower profitability that follows,” Wagner said.

Do you think consolidations will start happening in the mortgage industry?

Consolidation after a major refinance market is part of the cycle, Wagner said. The loan sector consolidated in 1993-94 and 1998-99 after those periodic refinance booms ended.

Today’s mortgage industry looks vastly different from that of even a decade ago because of those changes, said Doug Duncan, chief economist of the Mortgage Bankers Association in Washington, D.C.

Of the 25 largest lenders in business when Duncan joined the trade association in 1992, only seven exist today, he said. Some merged with other companies while others just left the business after the refinance booms ended.

Hear what Doug Duncan of the Mortgage Bankers Association has to say about industry consolidation:

Those consolidations resulted in fewer very large lenders and gave those that survived a larger market share overall, Duncan said.

In 1990, the top 10 lenders had only 17 percent of the residential mortgage market share, Wagner said. The top originator that year, Fleet/Norstar, grabbed only a 2.7 percent share.

But last year, the top 10 lenders accounted for almost 60 percent of the market share, according to National Mortgage News. However, the gap in market share between the top three lender and the other seven top 10 lenders was steep. The top three–Wells Fargo, Washington Mutual and Countrywide Financial–each had more than $400 billion in loan volume and market share of at least 11 percent. The fourth largest, Chase Home Financial, had $284 billion in volume and about 7 percent of the market. The numbers dropped from there. Bank of America, ABN AMRO, GMAC Mortgage, CitiMortgage, National City and Cendant Mortgage (in rank order) captured at the most $130 billion and at the least $83 billion in volume and each accounted for approximately 2-3 percent of the market, according to National Mortgage News.

Still, more than 7,000 institutions now originate mortgage loans, although mortgages for the most part are not their primary business. Many close only 300-400 mortgages per year, Duncan said.

These smaller mortgage lenders will continue to exist even as consolidation picks up, he predicted.

“You’re still always going to have lots of mortgage lenders, but their share of the market is going to be small,” he said. “That’s a good thing (because) it keeps competitive pressure on the bigger guys.”

Midsize firms have largely disappeared from the market, Duncan noted. That means consolidation will occur primarily among large lenders or as a result of larger lenders buying smaller firms. Large firms may seek acquisition candidates that address a geographic or product market niche they particular want to target.

Survivors most likely will be companies that offer more than just loan refinancings, Wagner predicted. Those that have a well-rounded business approach typically will fare better in a rising interest-rate climate.

Loan servicing could be the difference between survival and takeover, according to Countrywide Financial Corp.’s president and COO Stanford Kurland.

“Those originators who don’t have the capacity or the desire to service loans will be hard pressed to sustain their earnings when production volumes slow and they have no infrastructure in place to capture revenue streams from other sources,” Kurland said at a recent investor meeting.

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