Alltel Information Services Inc.'s mortgage division is in talks to buy Dovenmuehle Mortgage Inc., a mortgage subservicing specialist, market sources say.

The deal would allow Jacksonville, Fla.-based Alltel, which provides systems and software for home-loan servicers, to diversify its mortgage- related business, and widen the array of services it can offer its mortgage-banking clients.

But it could also put Alltel in competition with those clients who do subservicing themselves, some suggested.

"If they buy that, I'd think their clients wouldn't like it," said Sadu Thinakal, president of the mortgage unit at Fiserv, Alltel's biggest competitor.

"We would be surprised and disappointed if they would take an action that would appear to put them in competition with us," said Michael Hyman, senior vice president at Wendover Financial Services Corp., a Greensboro, N.C.-based subservicer. "We would have a serious concern."

Dovenmuehle, of Schaumburg, Ill., used to buy servicing rights through limited partnerships in the mid-1990s, but now its business is focused primarily on subservicing. It services about $30 billion of loans, but owns the servicing rights for only $330 million of residential loans and $550 million of commercial mortgages.

Mr. Hyman added that his company has had "a great relationship with Alltel." He said he had not heard from Alltel whether or not the deal rumors were true.

For weeks, the market has been buzzing with rumors that Alltel and Dovenmuehle were in talks. National Mortgage News' MortgageWire took note of the rumors last month. Officials at Alltel and Dovenmuehle declined to comment.

Alltel is the industry leader in providing servicing software, with $1.5 trillion of mortgages being serviced on its system. But its client base is eroding.

According to Jeff Lebowitz, principal of SSP Associates, Silver Spring Md., 55% of all mortgage bankers used an outside service bureau for data processing and systems in 1988. "We're down to a third now."

HomeSide Lending, one of the top servicers and a major account for Alltel, has been gradually moving its loans off Alltel's system in favor of a proprietary system for the past 18 months. As of July, about 90% of its $115 billion portfolio was no longer on Alltel's platform.

Subservicing is a form of outsourcing. Mortgage companies pay a subservicer to administer a loan portfolio, collecting payments and mailing statements.

Theoretically, by adding subservicing to its menu of services, Alltel would be able to tell customers it could do it all for them, from turnkey software through the actual work of servicing loans. But Mr. Lebowitz said his research indicates that "service packaging in outsourcing to mortgage bankers is attractive to only one in five firms."

"It makes sense to look at something akin to what they do today," Mr. Lebowitz said. However, subservicing may not be the best path to take. "I don't see it as being a growth business, unless they can increase the content of subservicing to make people service smarter and reduce costs measurably."

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