BancBoston Corp. and Barnett Banks have struck an unusual deal to pool their resources in the rapidly consolidating mortgage business.
The banking companies announced Monday that they are forming a joint venture that will house $75 billion in mortgage servicing - $33 billion from Barnett and $42 billion from BancBoston. The new company - to be formed in the second quarter of 1996, pending regulatory approval - would rank sixth among mortgage servicers.
Each banking company will own one-third of the yet-unnamed entity, with the remaining one-third split between two venture capital firms, Thomas H. Lee Co. and Madison Dearborn Partners.
Observers hailed the cooperative approach as a creative way for the two companies to quickly achieve the economies of scale needed to compete in the servicing business.
"It's revolutionary," said Edward E. Furash, a Washington-based banking consultant. "Ten years ago, no one would have thought of this happening."
By sharing the costs of maintaining back-office staff and technology, BancBoston and Barnett - respectively the 14th and 30th largest servicers of mortgages - expect to trim operating costs and boost profits while sharing management expertise.
That goal is very much a trend in the mortgage servicing field. Servicing - the business of collecting and processing monthly loan payments - has long been the backbone of mortgage operations, supplying steady income from ongoing fees.
But increased competition and advances in technology have put great pressure on margins, forcing lenders to get bigger through acquisitions, find a specialized niche, or get out of the business.
Though they are pairing up to handle the back-office functions, Barnett and BancBoston intend to control their own lending activities.
Barnett will continue to originate its own loans, while BancBoston, which laid the groundwork for the venture last December, will use the joint undertaking as its lending vehicle.
"They're saying the way to compete is to look at things on a cooperative, consolidated basis," said Gareth Plank, mortgage analyst at Rodman & Renshaw, San Francisco. "It shows you don't have to go out and acquire to be in the big leagues."
But Mr. Plank cautioned that the strategy is not risk-free. "You're taking two different cultures and asking them to achieve a task," he said. "Most banks like to operate independently."
Joe K. Pickett, chairman of BancBoston Mortgage, will serve as chairman of the new venture, and Hugh R. Harris, president of BancBoston Mortgage, will be president.
In a telephone interview Monday, Mr. Pickett called the partnership "a defining event within the mortgage industry."
He said the partnership gives BancBoston and Barnett the wherewithal to handle a growing portfolio without the upheaval and expense of acquiring rival companies.
"This brings size, scale, and productivity to the organization," Mr. Pickett said. He added that he has spoken with the Office of the Comptroller of the Currency and is confident of winning its approval.
Francis Seabrook, president of Barnett Mortgage, said the deal will have benefits in addition to reducing the cost of servicing loans. For instance, he said, Barnett will be able to offer some BancBoston loan products.
Mr. Seabrook will remain as president of Barnett Mortgage. His role with the new entity, while still sketchy, could include a seat on its board of directors.
Both Barnett Mortgage and BancBoston Mortgage are based in Jacksonville, Fla., and their servicing units there will be consolidated, according to Mr. Pickett. Barnett also has a servicing unit in San Antonio, which would remain open, he said.