If publicly traded mortgage companies were animals, they would be on the endangered-species list. Only a few healthy ones remain.
But don't tell Joe K. Pickett, chairman of HomeSide Lending Inc. His company is charging headlong into the mortgage business with a fierce approach that is symbolized by its mascot, a six-foot-long alligator that lives in a pond in front of HomeSide's Jacksonville, Fla., headquarters.
The company, a giant from its formation less than a year ago through the merger of BancBoston Mortgage and Barnett Mortgage, says it is determined to devour the servicing portfolios of distressed lenders that need cash to shore up their profits.
It also plans to form alliances with banks that need a strategic partner to handle the task of processing monthly loan payments profitably.
To help it along this path, it filed last month with the Securities and Exchange Commission to sell stock. The decision to go public so quickly surprised most observers - including some HomeSide executives.
Now the company faces the challenge of making it all work by delivering profits that satisfy not only its founding partners, which will retain a majority interest, but the new public shareholders as well.
Mr. Pickett, a 25-year industry veteran, acknowledges that the business can be risky. "If you want to be a leader, you have to be in front, and sometimes that's dangerous," he said.
HomeSide has adopted an activist strategy to defend against prepayments in its servicing portfolio, perhaps the biggest risk it faces.
It has also adopted a hedging technique similar to the one employed successfully by Countrywide Credit Industries, using options on Treasury bonds. The options rise in value when interest rates are falling, which is when borrowers are most likely to refinance.
Mr. Pickett, speaking before HomeSide filed for its public offering, said he was taking a fierce approach to cost control, making it a major and continuing strategy. The company has declined to comment since the filing, citing regulatory restrictions.
Bolstering the cost-control function, HomeSide recently hired Kevin D. Race, who had been president of Fleet Mortgage Group, as its chief financial officer. Mr. Race is one of the few top people at HomeSide who was not a BancBoston Mortgage executive previously.
In planning to go public now, HomeSide is bucking the tide. There aren't many pure-play mortgage companies left other than Countrywide and North American Mortgage Co. After a flurry of public offerings in the early 1990s, the independents have been gobbled up as large banking companies such as Norwest Corp. and Chase Manhattan Corp. bolstered their mortgage operations in the last few years.
While several other newly public mortgage companies have had short histories, analysts believe HomeSide may be different, partly because of its strong sponsorship by Bank of Boston Corp. and Barnett Banks Inc.
A competitor said the company could become "a new Countrywide." Thus, he was comparing HomeSide to a highly regarded company that is the nation's second-largest mortgage originator and servicer. Countrywide has struck a balance between originations and servicing, enabling it to weather interest rate swings better than most other mortgage companies.
Indeed, HomeSide would have a fully balanced mix with the addition of a subprime lending capability. Gerry Risi, senior vice president of Fort Lauderdale, Fla.-based CoreStates Capital Markets, said HomeSide should bulk up in so-called B and C loans - those to consumers with blemished credit histories - which have been yielding higher margins than conventional loans.
HomeSide was formed in December 1995 by Bank of Boston and two venture capital firms, Thomas H. Lee Co. and Madison Dearborn Partners, to purchase most of Bank of Boston's mortgage assets.
HomeSide began operations last March 16, and in May completed the acquisition of most of the mortgage operations of Barnett. Bank of Boston and Barnett each own a third of HomeSide and the two venture capital firms own the remaining third. The filing said the group would retain a majority interest but did not say how large.
On the acquisition side, the newest recruit, Mr. Race, brings a lot to the table. He is known for his Wall Street connections - and a knack for making quality acquisitions. In fact, his hiring brought a swell of rumors that HomeSide was looking to go public.
HomeSide hasn't made any acquisitions yet, but the company is looking to take advantage of industry consolidation and believes that in the next few years, it will have ample opportunities to boost its servicing assets through bulk purchases.
"As there is consolidation in the industry, servicing portfolios will be sold to cover operating expenses. The company we build is designed to take advantage of that," Mr. Pickett said.
HomeSide's main emphasis is on servicing. As of Nov. 30, the company had a servicing portfolio of $88.7 billion and had originated $14.8 billion since March 16, ranking it as one of the top 10 servicers and originators of mortgage loans.
Mr. Race said HomeSide would seek out smaller banks that want to sell their servicing. The company also thinks that it has an effective strategy to hold on to customers wishing to refinance or otherwise replace loans it services.
Once loans have been purchased or originated, stanching runoff becomes critical. On average, one loan in 10 pays off each year, and HomeSide believes it takes a combination of quickness and canny merchandising to beat the odds.
The company strikes early, when customers call HomeSide's servicing center about paying off their mortgage. "Our goal is to turn those calls into loans," said Dan Scheuble, executive vice president.
The call is routed to a telemarketing center, where representatives rapidly access a customer's history and the type of refinancing or new financing they may qualify for. The representatives also tell borrowers they will know in hours, not days, whether they qualify.
Still, HomeSide's overall retail presence, let alone its telemarketing network, is small. More than 95% of HomeSide's production volume derives from wholesale channels and the company realizes that it has to diversify its production outlets.
"If you hitch your wagon to just one technique, being able to shift is very difficult," Mr. Pickett said.
To that end, Mr. Race said that the company would likely look to diversify its origination channels by purchasing more kinds of retail production.
HomeSide also faces the challenge of marketing itself. How will it fare when its sole business is the unpredictable and marginally profitable area of mortgage lending?
"People have been pretty negative on the mortgage industry generally," Mr. Race said before the company announced its intention to go public. Interest rate fluctuations can have a major impact on the earnings of companies that are not actively hedging their portfolios against that volatility, he said.
"If the risks are properly controlled, if you control costs and benefit from economies of scale and have access to capital, you will have strong returns," he said.
Easier said than done, but HomeSide thinks it is on the right track.
Mr. Pickett, one of more than 20 HomeSide executives with an ownership stake in the company, knows that being among the largest mortgage banks is not enough.
"We're not doing this just for bragging rights. This must be done profitably," he said.
Karen Talley contributed to this article.