Mortgage Operations Flop Because They...

• Overpay for servicing and then experience dramatic runoff.

• Can't reduce their cost structure quickly enough in response to plummeting volumes.

• Don't hedge their pipelines against rate changes.

• Experience excessive loan defaults and run out of cash.

• Rely on only one type of customer--for example, the refinance customer when rates move away from that market.

By and large, the mortgage industry is not designed to exploit economies of scale. Mortgage lending is a fragmented business made up of thousands of competitors. One-person mortgage brokerage firms compete with national giants, and everything in between. Lending is still a local activity for thousands of banks, mortgage brokers, and credit unions. These firms don't focus on economies of scale for success in other lines--why should they consider it critical in mortgage lending?