Amid a two-year refinance boom, as mortgage companies large and small have been making money hand over fist, the merger-and-acquisition landscape has been barren aside from the ever-hungry Washington Mutual Inc.

But many observers say that the first rise in interest rates may bring a consolidation boom as some players seek to reduce their exposure to the mortgage markets by selling.

Jeffrey Levine, managing director with Bayview Financial Advisory Services in Miami, said,"There will probably be another wave of whole-company consolidations amongst the top-30 mortgage lenders, particularly where mortgage units have been good sources of earnings for their parent," he said.

"You're going to see amongst the middle-market players, probably between Nos. 10 and 30, a few lenders that are very prime targets, good franchises of a size that are easily digestible," Levine continued, declining to name any companies that might make deals. "There may also be some of the larger ones that are harder to digest and who either haven't performed very well or might not fit into their parent's long-term strategic plan."

He also listed an economic recovery as a trigger for mortgage mergers.

Rick Thornberry, the CEO of Nexstar Financial Corp., an outsourcer in St. Louis, said that "of the top 15 there today, a year from now there will have been some activity. It seems to happen every year."

Government statistics released this week support Thornberry's prediction. The 10 largest originators made 51% of single-family mortgages last year, against 41% in 2000. The top 25 control 69% of the single-family business, or more than double their market share less than 10 years ago, according to the Office of Federal Housing Enterprise Oversight.

"Scale is just increasingly important in this business," said David Schneider, the CEO of Citimortgage, another St. Louis outfit. "Our costs are very technology-driven. The ability to leverage that technology over a large number of loans is part of our profit picture."

There is room for more consolidation, Schneider said, because "relative market shares aren't that high." For instance, Citigroup Inc. will have roughly 5% of the mortgage market once it completes its purchase of San Francisco's Golden State Bancorp next quarter. "That really by most industry standards is not extremely high," Schneider stated.

ABN Amro Mortgage Group Inc., a unit of ABN Amro Bank NV, climbed the mortgage lender ranks through acquisitions.A minor figure in mortgage banking just several years ago, ABN Amro Mortgage is now the United States' No. 5 originator and No. 7 servicer according to American Banker and ASR sister publication National Mortgage News, and CEO Stan Rhodes said it will keep expanding.

"We are always looking at acquisition opportunities," he said in an interview last week. "We have not found at this point any players that we really find attractive, but that doesn't mean they're not out there."

For instance, Rhodes said, if an operation like PNC Mortgage - a midsize lender with a good balance of originations and servicing - became available, ABN Amro Mortgage would be interested. "We would be a player in that type of opportunity," he stated. ABN Amro Mortgage was outbid for the unit of Pittsburgh-based PNC Financial Service Group Inc. by Washington Mutual in 2000.

Rhodes also sees more consolidation ahead in servicing. "Some of the big players have gotten full at the moment, but as soon as production slows down, they'll be back at it," he said.

Michael McMahon, an analyst in San Francisco with New York-based Sandler O'Neill & Partners LP, said that companies targeting Web-savvy companies and consumers, such as Nexstar and NetBank, of Columbia, S.C., are poised to grow.

But firms on the periphery of the mortgage business could be the giants' next targets.

Thomas Garvey, executive vice president with Chase Manhattan Mortgage Corp. in Edison, N.J., said the purchase of vendor-services firms "might be worth exploring."

"All of those ancillary third-party support activities might lend themselves in ways" that could help Chase, he said.

"We are looking at investments in technology, and/or looking at technology investments that might be out there as opportunities to acquire," Garvey said. "We look at the ability for us to reduce costs and provide better customer satisfaction. We can pick up skills, technology, or tremendous growth opportunities if things come at the right cost."

Well-priced deals could be in his company's future, but Garvey stated it is stressing organic growth. Over the past two years it has been "dramatically increasing" its retail sales force, he said. "We are growing our home equity product," Garvey said. "Our belief is doing business directly with consumers with an emphasis on consumers within our bank footprint."

- Erick Bergquist (abridged from a story that originally appeared in American Banker)

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.