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Boardroom view.

Although you tend to read more about big buyers of servicing than sellers, obviously it takes both to make the market work. In a random sampling of just a few companies we turned up a few mortgage companies with major buying plans this year but also some who would not be buying any servicing. The companies on the sidelines were either growing their servicing portfolios through active wholesale operations or held back by capital constraints or digesting mergers with other institutions.

What this glimpse of the market underscored is the fact that there are a lot of different mortgage servicers out there facing widely differing circumstances in terms of their plans and capacity to acquire servicing in today's market. Ownership structure and access to capital had a lot to do with plans to buy servicing.

Jerold K. Hoerner, president of METMOR Financial Inc., Overland Park, Kansas, says his company's minimum acquisition goal for 1992 is to add 25,000 loans to METMOR's servicing portfolio. The portforlio currently stands at 201,000 loans and by late April the company had "picked up something in the teens" in terms of additional loans to service. Hoerner said his servicing portfolio totaled roughly $8.3 billion, while the goal is to have it at $9.9 billion or so by year-end 1992.

In terms of what is out there to buy, Hoerner noted, "you've got some real big portfolios out there, but some have companies connected to them and I'm not wild about buying a company--there's some latent liability issues involved with that."

Hoerner says METMOR acquired its first servicing package from the RTC but had not yet finished absorbing the portfolio. He said it was too early to know with any certainty what the returns will be on that purchase. METMOR Financial, a mortgage company subsidiary of Metropolitan Life Insurance Company, is also "working on [acquiring] another major RTC portfolio," Hoerner said. He said his company made the "final cut" in terms of the bidding and will go out and do some due diligence on the portfolio sometime this month.

Commenting on the prices being bid for RTC servicing, Hoerner confirmed that there definitely has been a runup in those prices. When asked if these porfolios were more pricey than you would expect given the risk involved, Hoerner said, "it's approaching that rapidly."

Hoerner said he is surprised by the high prices being paid for servicing. "I can't imagine [the bidding] gettimg more aggressive than it is today." He added that some buyers are "truly stretching for these portfolios. Part of what's driving the aggressive bidding, he says, is that today, with some companies set up strictly as servicing companies, and with the "precipitious runoff" of loans, the people who put their capital in a servicing operation, in order to sustain their growth plans, will need to go and buy more product."

Right now, METMOR is favoring flow acquisitions, although the company does both bulk and flow acquisitions. Hoerner says the bias toward flow is due to the fact it represents current low interest rate servicing that has a good chance of staying on the books for a longer period.

A major buyer of servicing in 1991, Chase Home Mortgage Corporation, Tampa, Florida, will also be buying servicing in 1992, but not at quite the torrid pace of the year before. Fred Koons, chairman of the board and CEO, said his company will "probably look to increase [its servicing portfolio] only by about $5 billion." Last year, he noted, the portfolio grew by more than $10 billion. He stressed that Chase would like to find between $5 billion and $10 billion but the mortgage company hasn't seen a lot of large packages this year of the size it wants to buy. Koons said he has seen quite a few packages this year in the $200 million to $300 million range, but only a couple in the billion dollar or more category.

Currently, the Chase Home Mortgage servicing portfolio totals about $35 billion, but at the end of last year it was roughly $37 billion. The downsizing is accounted for by about $1 billion in net runoff and the sale of roughly $1 billion in off-shore servicing, Koons said. He added that the runoff appears to have peaked in March, after being heavy from January through March.

Koons said that the company would like to grow its servicing portfolio by bulk acquisition but the target growth goals this year may not be reachable via that route, if the shortage of large packages on the market continues. He noted that prices have "firmed up." Koons said that it "looks like supply and demand are pretty much in balance" currently. Koon's company has bid on a couple of RTC packages and won them but they have been very selective about what they bought. "I don't have a lot of hopes of finding what we want" from heavy RTC buying, he said.

The mortgage subsidiary has not sold any servicing since 1987, noted Koons. The company's earnings and some capital from the parent bank have helped finance the servicing purchases, and capital restrictions on purchased servicing held by banks has not been a problem to date. Koons said he does not think his company has a lot of excess servicing capacity, but it can handle the purchases that the plan calls for in 1992. The production side of his company will originate roughly $8 billion this year and almost all of that will be retail originations or table-funded production.

James Trepinski, president of M-West Mortgage Corporation, Orange, California, said his company will not be an active buyer of servicing this year because any servicing acquisitions it did would be dictated by available cash. M-West's plan is that any servicing acquisitions this year will be handled by cash from operations. The firm is privately held by management and other investors. The company's portfolio currently totals about $3 billion, which is slightly down from the year-end 1991 total of roughly $3.1 billion due to runoff. The runoff of older loans has modestly exceeded originations, partly due to warehouse line constraints for this private mortgage banking firm. Trepinski said his production has been running at $70 million to $75 million per month, but it could be higher if the warehouse line constraints were not an issue.

M-West's long-range goal is to grow the servicing portfolio, but currently the goal is to keep the gap between the runoff and new originations to an absolute minimum.

Colonial Mortgage Company, Montgomery, Alabama, also will not be in the servicing purchase market this year because it is concentrating on its wholesale originations to grow its servicing portfolio. Ronnie Wynn, president of Colonial, said the company's portfolio currently totals $2.7 billion and the target for year-end 1992 is to grow it slightly to $3 billion. Wynn said that Colonial is selling all of its retail production servicing released, including all government production. All of its wholesale production is conventional, Wynn said. Colonial is trying to restructure its servicing portfolio away from its previous heavy concentration in GNMA servicing. Currently, 50 percent of the servicing is GNMA and the goal is to have that concentration decrease to 35 percent.
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Title Annotation:mortgage servicing
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Article Type:Column
Date:May 1, 1992
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