Consolidation Is Changing the Face of the Industry

The acquisition market whipped into a frenzy last year, as once mighty mortgage giants dissolved and smaller players swooned from interest rate shocks. (See table, page 28.)

Lomas Financial Corp. fell into bankruptcy this month after two decades as an industry Goliath. Analysts said a series of missed market opportunities and a failure to hunker down when times got tough pitched the Dallas lender over the brink.

Lomas' remaining $17.26 billion of servicing is going to First Nationwide Bank's mortgage unit, for $150 million, provided a bankruptcy court approves the sale.

In another megadeal, two banks - Norwest Corp. and First Union Corp. - are reportedly vying for the majority of Prudential Insurance Company of America's mortgage operation.

The banks have their eye on $72 billion of servicing, $42 billion for Norwest and $30 billion for First Union, sources close to Prudential say.

The Pru unit could pull in as much as $1 billion, making the dismantling the largest transaction of its type, analysts said.

The Prudential and Lomas deals will surely go down as high marks in the acquisition derby. But the deals are just two in a spate of recent activity.

The past year saw more than 50 deals to acquire servicing, origination expertise, and geographic expansion, according to data compiled by SNL Securities, Charlottesville, Va.

Notable transactions include the $165 million Mellon Bank Corp. paid for Metmor Financial and its $13.6 billion of servicing.

In another major deal, Barnett Banks acquired $14.8 billion of servicing from BancPlus Financial Corp. for $160 million. And Norwest paid $230 million for the $13.1 billion residential servicing portfolio of Directors Mortgage Loan Corp.

Observers say the transactions are hardly the final word, as large lenders get bigger and many smaller mortgage firms get out.

"The mortgage business will go through more of the same," said Key Bank USA chairman A. Jay Meyerson.

Keycorp, in fact, exited the servicing business earlier this year by selling a $25 billion portfolio to NationsBank Corp. for $500 million, one of the largest transactions of its type.

Analysts say the mortgage business, especially on the servicing side, requires the right technologies, seasoned management, and tremendous volume to achieve economies of scale.

Otherwise, "it's very tough to make money," Mr. Meyerson said.

Companies that can spread technology costs over a large amount of assets will have the advantage, analysts said.

"It's becoming a much tighter business," and margins will continue to be squeezed, said L. Todd Vencil, an analyst at SNL Securities.

In addition to belt-tightening, banks are looking at subprime lenders as a new way to create mortgage profits.

The Money Store, thanks to pitchman Phil Rizutto, is among the better known of these companies, which make "B" and "C" loans to people with tarnished credit histories.

Barnett was among the first to get into the business, by purchasing subprime lender Equicredit Corp. last year. Though both companies are based in Jacksonville, Fla., Equicredit's operations will not be folded into Barnett's more mainstream mortgage unit, executives said.

The merger and acquisition wave among bank holding companies is also producing some interesting pairings.

Perhaps most notably, a merger agreement between Chemical Banking Corp. and Chase Manhattan Corp. will create the country's largest banking company, and its biggest mortgage lender.

Smaller but still significant are mergers planned by First Union and First Fidelity Bancorp., NBD Corp. and First Chicago, and Meridian Bancorp and CoreStates Financial Corp.

The teamings will create powerful mortgage operations, armed with significant servicing and reach.

Banks are also the architects of a new way of consolidating - allowing peers to take over their mortgage operations. In the largest example of this activity, Norwest recently began operating the mortgage program at Wells Fargo & Co.

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