Ten years ago Countrywide Home Loans was the nation's No. 1 ranked residential servicer with $110 billion in housing receivables on its books and a market share of 3.23%. Today, Countrywide is still No. 1 — after a few years of being ranked second and third — but its market share has grown to 11.43%.

Over the past decade the California-based company's share grew by 253% while its receivables jumped by 711%. (At the end of March 2005, Countrywide serviced $893 billion in home mortgages, about $20 billion ahead of the No. 2 ranked Wells Fargo.) Countrywide's founder and chairman Angelo Mozilo has long expressed his desire to see Countrywide have a 20% market share. Can Mozilo and his talented crew pull it off?

Judging by the numbers (which come from the MID and its affiliates, including the Quarterly Data Report), it would appear that Countrywide is facing a conundrum: the faster it grows — and the larger it grows — the overall market is growing even faster, much faster. Will it be able to catch up?

It's no secret that Countrywide clawed its way back to the top by becoming a correspondent-buying behemoth. (When it buys loans in the correspondent channel it usually buys the servicing rights as well.) Its retail and wholesale growth has been impressive, no doubt, but it really turned on the juice by aggressively purchasing already-funded loans (the correspondent channel) from other mortgage banking firms. Is there anything wrong with this strategy? Not really — as long as you keep your production channels diversified and (more importantly) as long as you don't overpay for mortgages. Anyone who knows Angelo Mozilo and his No. 2, Stan Kurland, realize that these two grizzled industry veterans never overpay for anything.

Overpaying for correspondent production — as Messrs. Mozilo and Kurland will understand — is the quickest way to the abyss. The industry is littered with examples of mortgage firms that thought they could buy market share in the correspondent niche while ignoring both price and their other channels. Do the names HomeSide Lending and Lomas & Nettleton ring a bell?

If Countrywide continues to grow as it has, it likely will never achieve a 20% share (or it will take forever to get there) because the overall receivables market is growing even quicker. It's simple math. (Sort of.) As always, there are a few "wild cards" to think about. Countrywide could get to 20% by acquiring a top 10 competitor or two. Historically, the company has mostly chosen to grow "organically" instead of by acquiring others. Based on the stellar profits it posted the past two years, this strategy has paid off handsomely.

Another possibility is that the housing and mortgage markets will collapse in a mushroom cloud once the housing "bubble" finally implodes. If — and when — that happens, Countrywide will be able to buy servicing and lending competitors on the cheap. In fact, firms will be lining up to sell like panicked customers of the Bailey Building & Loan.

But don't hold your breath. No one in the industry is seriously buying the housing bubble thing, at least not yet. Sure, there will be some "slow leaks" in housing prices in certain markets but as long as borrowing costs stay cheap (thanks to interest-only loans), it's not likely to happen anytime soon. So, how does Countrywide, or anyone else for that matter, achieve a servicing market share of 20%? Maybe they don't, at least not in the next year or two. After that, all bets are off.

The Top 10, the Consolidation Game

Even though Countrywide doesn't yet have a 20% share of housing receivables (or even 12%) the top 10 servicers, as a group, control 57.65% of the $7.8 trillion servicing market. At year-end 2003 the top ten controlled 51.64% which means over 15 months the group picked up 6 market share points and then some. That's impressive. But what's even more impressive is the market share gains of the past 10 years. Back in 1995 the top ten had a share of 24.95% (see table). In a decade the top servicers have more than doubled their control of the industry.

One of the chief reasons for the gains is consolidation - the purchase of a small- to medium sized servicers or a mega servicer by big fish. Take a look at the nation's top five: Countrywide, Wells Fargo, Washington Mutual, Chase and CitiMortgage. Over the past decade all of them - with the exception of Countrywide - has been a major acquirer of other firms. The first to take the plunge was Norwest (now known as Wells Fargo) which bought Prudential Home back in 1995, an $80 billion servicer. At the time it was the largest ever deal in mortgage banking history. After PruHome, Norwest went on to buy several other mortgage lenders and banks which is how it wound up with the current moniker of Wells Fargo, the 'stage coach' people from San Francisco.

Chase, WaMu and Citi all went through their "acquisition phases," with some of these shops (WaMu in particular) going a little bit over board. WaMu's acquisition-related woes have been well documented on the pages of National Mortgage News and for the complete story you may want to read our archives. Suffice to say WaMu's problems appear to be behind it and the company could once again become a buyer — but a more modest buyer — of other financial institutions. Then again, it also has been mentioned as being a takeover target for a foreign bank.

Beside consolidation, one interesting trend of the past year has been the emergence of Wall Street firms as buyers of servicing firms, in particular subprime, specialty, and "scratch and dent" servicers. The Street has done this because it sees gold in the mortgage hills.

Over the past two years investment bankers have been jumping into the nonconforming market like a hippo in a kiddie pool. All the boys are there: Bear Stearns, Goldman Sachs, J.P. Morgan, Merrill, take your pick. Why? Answer: profits. The interest-only, payment option, alt-A, and subprime markets have been red hot. Then again, what goes up must come down. Margin compression was evident by mid 2005. Will the Street firms stick around? Stay tuned.

The Results/How the Survey was Done

In this chapter we provide profiles on the top 300 servicers and rankings on 450 firms. (If you desire more servicing-related information you may want to purchase the eMID, Servicer module. If so contact Deartra Todd at 202 434-0320.) The results were culled from exclusive surveys sent out by National Mortgage News and its research group in Washington, D.C.

Surveys were sent to more than 3,000 active residential lenders/servicers in a database built by NMN. Mortgage firms of all stripes (mortgage bankers, banks, thrifts, credit unions and others) were asked to fill out a three-page survey and return it to us within 30 days. At least two follow-up telephone calls or faxes were sent as well. In some instances companies declined to participate. In certain cases we estimated a firm's servicing volume based on previously reported numbers or from information provided by the Government National Mortgage Association or Office of Thrift Supervision. If you work for a firm that is missing from these rankings would like to participate drop us a line. Countrywide ranked first among residential servicers at year end (no surprise there), followed by Wells Fargo ($873 billion), Washington Mutual ($730 billion), Chase Home Finance ($562 billion), and CitiMortgage ($375 billion). The top five, as a group, had a combined market share of 42.37%. In the first quarter of 2005 that share had grown slightly to 43.95%. For a complete ranking of the top 450 servicers turn the pages.

What's Ahead for Servicers?

Mortgage economists expect that during the next decade U.S. housing debt should grow, on average, by 8% to 9% a year. Not only do more U.S. citizens want to become home owners but as the value of homes appreciates (and appreciates greatly) consumers will continue to tap their home equity like a piggy bank. Cash-out refis have been strong the past three years and will slow over the intermediate term. But overall Joe and Mary Six-pack will continue to tap home equity as they see fit. This may not be good for the consumer (if they don't manage their debts carefully) but certainly mortgage lenders and servicers will benefit.

The good news for consumers is that rates will stay low — or at least it looks that way. Predicting where rates might be headed is a game even the best of economists fail at —constantly. Falling rates are good for consumers but as any mortgage servicing executive can tell you there is a dark side to low rates: servicing impairment charges.

In 2003 servicers (Countrywide, Wells, WaMu, take your pick) booked billions in "impairment" charges as their housing receivables turned into vapor. In 2004 the carnage subsided and some firms were lucky enough to capture impairment set-asides that were never tapped. Firms that don't learn the hedging lesson will be the next to exit the stage.

No one ever said mortgage banking was an easy business. Just when you think you have it all figured out (especially in regard to rates) you suddenly learn that you don't. In short: Anything can happen. Chances are one or two top ranked servicers will leave the industry in 2005/2006. Which ones? To find out keep reading National Mortgage News and Mortgage Servicing News.