Citing savage competition, the mortgage unit of First Bank System Inc. is halting its purchases of loans from other lenders.
St. Paul-based FBS Mortgage Corp., which has bought about $3 billion of home loans this year, will stop arranging purchases at yearend and refocus on retail originations, said chief operating officer Duane White.
The action, which will remove FBS from the nationwide mortgage scene, raises a red flag about a widely used technique for producing home loans.
Over the past few years, scores of mortgage lenders have stepped up their purchases of new loans in efforts to build their servicing portfolios.
Too High a Price?
In the view of FBS however, buyers are paying too much. The premiums, Mr. White said, fail to fully reflect the high loan prepayments spawned by the refinancing boom. In other words, homeowners are paying off their mortgages before the buyers earn adequate returns.
"We concluded the best thing to do was to just exit the business, rather than drop our pricing to a point where we'd risk getting only deals with some kind of potential problems associated with them," he said.
Rivals and analysts said that price competition in mortgage purchasing -- also known as "correspondent'" lending -- has indeed become fierce, threatening profitability.
"The number of companies that acknowledge this problem is going to increase over time," said Thomas LaMalfa, an independent consultant based in Shaker Heights, Ohio.
To Increase Retail Effort
FBS, according to industry sources, began reviewing its purchase program earlier this year after rising prepayments forced the company to write down the value of servicing rights obtained through loan puchases. The size of the writedowns could not be learned.
To remain active in mortgage banking, the company plans to pump up a retail production effort that is now yielding about $4 billion of loans a year.
Unlike the purchasing business, which has been active in virtually every state, the retail operations are concentrated in just six: Minnesota, Colorado, Montana, North Dakota, South Dakota, and Wisconsin.
Meanwhile, sources said Michael Kozlak, president of FBS Mortgage and the driving force behind the nationwide operations, is planning to leave. Mr. Kozlak could not be reached and a company spokeswoman said only that there has been no change in his status.
