Lenders Consider Joint Ventures like HomeSide

When HomeSide Lending Inc. was formed from BancBoston Mortgage and Barnett Mortgage in May, many industry observers thought similar joint ventures would follow.

More than half a year later, it hasn't happened.

But now that Jacksonville, Fla.-based HomeSide is going public, will this spur mortgage banks to look at setting up HomeSide-like partnerships?

One mortgage banker said that there have indeed been discussions among lenders about forming joint ventures, but the talks all fell apart over the issue of control.

Bank of Boston and two venture capital firms first formed HomeSide in December 1995 to purchase BancBoston Mortgage. HomeSide then bought most of the servicing portfolio and other mortgage assets from Barnett Mortgage in May to form HomeSide as it currently exists. Most of its top executives are former BancBoston Mortgage veterans.

"Everyone wants to be, in effect, the Bank of Boston group," the mortgage banker said.

Robert N. Husted, principal of New York-based MIAC Risk Management Services, said he had also heard of discussions that didn't get too far. But he added that HomeSide's stock offering would "be the catalyst for deals that are on the cusp."

Few think that HomeSide's decision to sell shares to the public will lead to another round of initial public offerings from mortgage companies, mainly because there aren't many independent, privately owned mortgage banks left.

The main question is how profitable HomeSide will be after a full year of operations. Some in the industry are skeptical about HomeSide's earnings prospects.

But according to the S-1 registration statement filed with the Securities and Exchange Commission last week, HomeSide had net income in its first three fiscal quarters of $29.3 million and revenues of $154 million.

Mr. Husted added that the fact that HomeSide was going public so quickly demonstrated a "vote of confidence" from both of the bank owners and the venture capitalists.

And the mortgage banker said that with HomeSide going public so soon, the financial situation must be at least "semi-decent," especially since a third of the company is owned by venture capital firms Thomas H. Lee & Co. and Madison Dearborn Partners.

Thomas H. Lee is known as an astute investor who specializes in finding struggling companies, taking them public, and revitalizing them before selling for huge profits. He is probably best known for his purchase of Snapple Beverages several years ago. Mr. Lee took the then trendy Snapple public in 1992 and sold the company to Quaker Oats in 1994. Mr. Lee and his investors made about $900 million from the sale.

If the venture capital firms are seeking to cash in on their investment, now may be as good a time as any. Thomas J. Healy, director of mortgage banking strategies at Fort Lauderdale, Fla.-based CoreStates Capital Markets, said that this is a good time for the company to be going public because the interest rate environment has not been too volatile.

Mr. Healy said interest rates would have to "take a nose-dive" for the company to be severely affected following its offering. If rates were to tumble, HomeSide's servicing portfolio would be adversely impacted because the lower rate would increase prepayments. Currently, rates are inching up again.

Small swings in rates could wreak havoc on the earnings of some mortgage lenders. But Mr. Healy said that HomeSide has enough of a balance in origination capabilities and servicing, so that its earnings shouldn't suffer in a major way from interest rate changes.

As of midyear, HomeSide was the sixth-largest originator of mortgages and seventh-largest servicer.

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