Banc One Sells Servicing Unit To HomeSide

In a move that underscores the importance of size in the home loan business, Banc One Corp. is selling its mortgage servicing business to HomeSide Lending Inc.

Under an agreement announced late Wednesday, HomeSide, a Jacksonville, Fla., company recently bought by National Australia Bank, will pay $201 million for the $18 billion loan portfolio. It will also buy mortgages that Banc One originates through its branches.

The deal is a dramatic pullback by Banc One, one of the largest banking companies in the country and, until recently, a proponent of building its mortgage unit into one of the industry's largest.

"We came to the realization that it would be difficult to continue to compete without the size others in the industry have," said Brad Conner, chief financial officer at Banc One Mortgage.

Industry observers expect other banks to follow suit, as the costs of vying against large servicers become insurmountable. "Regional banks especially are under a lot of pressure," said Bill Curley, president of Cohane Rafferty Securities, Harrison, N.Y., which advised HomeSide on the transaction.

It can cost midsize lenders like Banc One almost $100 a year to collect and process payments on each mortgage loan. Larger companies, able to spread their expenses over more volume, cut servicing costs to less than $50 per loan.

As an additional expense, companies that service loans must also set up hedging units to offset interest rate risk.

Industry observers were surprised to see Banc One switch strategies but said it was the only way to go if the parent company declined to commit resources to buying loan portfolios and significantly boosting originations.

"The mortgage business is very capital-intensive and offers low returns," said Larry Swedroe, a former managing director at Prudential Home Mortgage.

Banc One, after spending the past few years trying to grow larger, found it "hard to get value and had a very difficult decision to make," said Mr. Swedroe, now a private money manager.

Under the deal, which is expected to close in the third quarter, Banc One will shut its 260-person Indianapolis servicing center and transfer 225,000 loans to HomeSide.

HomeSide will add the portfolio to its stable of one million mortgages as well as buying the production of Banc One's 1,300-branch network and its telephone and brokerage program. Last year's originations by Banc One totaled $3 billion, two-thirds from branches covered by about 250 loan officers.

To Banc One, the originations business, while not a big profit center, still serves a purpose. It will supply a core product to customers and help the parent develop cross-selling opportunities, Mr. Conner said. "The ability to originate mortgage product is a key component of our retail strategy," said the mortgage unit CFO.

HomeSide, wanting to improve profits by boosting volume, will take all the loans that Banc One can supply, said chairman Joseph K. Pickett.

"As scale becomes more important," he said, "steps like this become necessary to drive down costs."

HomeSide, under president Hugh R. Harris, already services a portfolio of nearly $100 billion of mortgages, amassed through programs with BancBoston Corp., the former Barnett Banks Inc., and a correspondent lending channel.

The future of the Barnett arrangement remains uncertain as both sides negotiate in the wake of Barnett's merger this year with NationsBank Corp.

HomeSide, through National Australia Bank, plans to set up similar programs with overseas banks that are affiliated with National Australia. Mr. Pickett is relocating to Australia to head that effort.

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