A $250 million writedown of mortgage servicing rights by the new BankAmerica Corp. stunned some observers, but others said big hits are now inevitable, given the consolidation in the loan-servicing business.

The writedown, which appears to be the largest accounting adjustment ever made on a portfolio of servicing rights, was among the most unexpected pieces of bad news in the newly formed giant's initial earnings announcement earlier this week.

Analysts said it seemed that the old BankAmerica-whose merger with NationsBank Corp. closed last month-had not taken steps to protect its servicing against the declining interest rates in the third quarter.

"It does not appear that they had any hedge on whatsoever," said Lawrence W. Cohn, analyst at Ryan, Beck & Co.

It was a stark reminder of the need to carefully manage the risk that customers will pay back loans earlier than expected, destroying the value of servicing-which is the business of mailing statements, collecting payments, and generally managing mortgage loans.

In the refinancing boom of the early 1990s Citicorp took a $100 million writedown in the value of its servicing portfolio, and Chase Manhattan Corp. and Fleet Financial Group followed with significant adjustments. Today, with the servicing consolidated into huge portfolios held by a handful of companies, the stakes are much higher.

Writedowns on the order of $250 million are "the natural outgrowth of consolidation. The numbers are getting bigger in absolute dollar amounts," said Scott McAfee, chief executive officer of chief executive officer of WMC Mortgage, a Woodland Hills, Calif. subprime lender.

The impetus for the writedown came from the NationsBank side of the family, which apparently took a more cautious approach to the valuation of mortgage servicing.

"The writedown occurred in order to conform the hedging process they were using with the process NationsBank had been using," a spokesman in the company's Charlotte, N.C., headquarters said. "To conform to the NationsBank formula we needed to take a writedown."

Accounting rules require mortgage servicers to book the servicing rights on loans they originate or acquire according to assumptions about the speed at which the loans will pay off. If actual prepayments are faster than expected, the servicers have to write the assets down.

"It appears NationsBank is just inherently more conservative in the way it values servicing to begin with," Mr. Cohn said. "I do think at least part of what was going on was the desire on the NationsBank management side to not have to come back and do this a second time."

The old Bank of America did have a hedge in place, the spokesman said, but "they used a different method. This was a matter of conforming the accounting going forward."

Market sources said that hedging was managed entirely by the bank's own corporate treasury, rather than by its mortgage subsidiary, which was in charge of the servicing. The major bank-owned servicers, including Norwest Mortgage Corp., Chase Home Finance, and now Fleet Mortgage, devote their own resources to hedging.

Low interest rates have proved to be a mixed blessing for mortgage bankers this year. Origination volume has been at record levels, making many loan officers, sales managers, and production heads rich.

But some companies have been forced to take writedowns this year because of rising prepayment rates, including Southern Pacific Funding Corp. of Lake Oswego, Ore.; Mego Mortgage Corp. of Atlanta; Delta Funding Corp. of Woodbury, N.Y.; and Capstead Mortgage of Dallas.

Most of those companies are primarily in the business of lending to borrowers with impaired credit. "The other shoe was going to drop on A paper, and I think it has now," with BankAmerica's announcement, Mr. McAfee said.

"Prepayments that are faster than normal are not limited to subprime originators," he said. "It's a total-mortgage-industry issue. I'm sure it's going to happen to others."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.