The subservicing industry was built on the basic premise of "build a better mouse trap" and you will succeed. It's no secret that the servicing/subservicing of residential mortgages has become an economies-of-scale business where the lowest-cost (and best-managed) provider winds up with the best profit margins. In the conventional market margins are so thin that if you can't compete as a servicer the best choice you can make is to exit the industry entirely or let a low cost subservicer do it for you.

And that's where firms like Dovenmuehle Mortgage, Cenlar FSB and Countrywide Home Loans come in. All of these top ranked subservicers have built their business on the basic idea "we can do it for you — and cheaper than you can do it for yourself."

In this chapter we present profiles on 43 firms that told us they subserviced home loans for other firms. In the previous edition of the Mortgage Industry Directory we had profiles on 47 firms, a net loss of four. Then years ago we had subservicing volumes on 80 firms. Industry consolidation is the chief cause of the decline.

Based on the surveys we collected $364 billion in home mortgages — or just 4.6% of all U.S. mortgage debt is subserviced. This isn't a very large number which means the subservicing sector has great potential for growth or ''mega" servicers the likes of Countrywide Home Loans and Wells Fargo are so entrenched that growth prospects could be poor. At the end of March 2005 Countrywide and Wells Fargo together serviced $1.77 trillion in home mortgages, giving these two giants a 22.6% market share.

According to figures collected for this book, both Wells Fargo and Countrywide are top ranked subservicers — ranking third and fifth, respectively — but are far from being number one. The number one subservicer is the privately held Dovenmuehle Mortgage of Schaumburg, Ill., which leads the market with $50 billion in contracts. Dovenmuehle's number, though, is an estimate based on prior surveys it filed with us. The company no longer answers our surveys and tends to disclose very little about itself. Still, it is well regarded in the subservicing industry.

The number two ranked subservicer is Cenlar FSB of New Jersey which has a thrift charter. Cenlar, according to figures it provided, had $35 billion in subservicing contracts on its books at year end. Cenlar, unlike Dovenmuehle, isn't so press shy. Wells was third with $26 billion.

The Future of Subservicing

The good news for servicers/subservicers is that residential debt in the U.S. is likely to grow at an annualized rate of 8% to 9% over the next 10 years. By mid-year servicing will be an $8 trillion industry. That's great news for firms that make their living by servicing residential mortgages. The more loans there are — the more business for everyone involved. The continued boom in "cash-out" refinancings and HELOCs will be beneficial too.

But as we alluded to earlier, growth in subservicing is questionable and hard to predict. We know that Countrywide Home Loans is a major processor of home mortgages in the United Kingdom, but few other U.S. firms have ventured overseas. If there is room for growth it could be by going East over to Europe, not West.