Arbor National Holdings Inc. reported that it increased its mortgage-servicing portfolio by 155% in the quarter ended Aug. 31, to about $4.2 billion.
The company also said it was experiencing prepayments at an unusually low annual rate of 16.6%. Major mortgage banks and the secondary-market agencies have been reporting runoff rates of 30% to 40%. Even with originations surging, most lenders have been running hard to build their servicing slightly or merely hold onto what they already have.
"We have a very low note rate, one of the lowest in the industry," said Joseph Heller, Arbor's director of investor relations.
"We've decided to hold onto most of our servicing, and what we have been selling is out of our seasoned portfolio."
While mortgages that have been outstanding for several years are generally considered less likely to default than new ones, at present they also carry higher interest coupons, making them more likely to be refinanced.
Mr. Heller also said Arbor does not offer no-points mortgages, preferring instead to build the stability of its servicing portfolio by offering loans with points and lower interest rates.
"We believe you get better quality with points loans, since the points are paid up front and the monthly payments are less," said Mr. Heller.
An Analyst's View
Gareth Plank, an analyst with Mabon Securities in San Francisco, agrees. "When somebody pays a lot in points to get into a mortgage, they are more likely to be committed to the mortgage he says.
Mr. Plank is enthusiastic about Arbor's strategy and has a buy recommendation on the stock. "They are managing for economic purposes, not just to keep the Street happy," he said.
Mortgage banking companies often sell newly originated servicing rights to stabilize quarterly earnings in an effort to please investors.
Arbor, based in Westbury, N.Y., has its business concentrated in the Northeast but also has retail offices in several other states.
