London's Barclays Bank PLC is looking to sell its U.S. mortgage unit after a large but ill-timed expansion.
Industry sources say the banking giant has retained Smith Barney Inc., New York, to help sell Barclays American Mortgage. The unit, which services some $17 billion of loans, could fetch more than $225 million, experts said.
After expanding its servicing portfolio more than 300% from 1989 though 1992, Barclays American was walloped by loan prepayments during the refinancing boom of 1992 and 1993. As consumers paid off their loans to take out new ones, Barclays was forced to make heavy writedowns on the value of its servicing assets.
As a result, the mortgage unit recorded a loss of $366 million in 1993. It has recovered slightly, showing a profit of about $6.2 million in the first three quarters of 1994.
After the prepayment woes arose, Barclays American, based in Charlotte, N.C., was placed into a new division called U.S Transition, along with other assets in the United States that the bank considered doubtful or not of core interest.
Sources said that Barclays was marketing the servicing portfolio - the unit's most valuable asset - separately from the rest of the operations.
A Barclays spokeswoman declined to comment.
Though details of the bidding could not be learned, Norwest Corp., which has been actively acquiring mortgage assets, is said to be one of the bidders for the servicing portfolio. A Norwest spokesman declined to comment.
The sale effort comes an no surprise to some observers. "Barclays American has really not been central to the bank for some time," said Christopher Smith, an analyst with James Capel in London.
Barclays is believed to be marketing the servicing portfolio as a package to a limited group of bidders, according to sources. The portfolio, $17 billion at June 30, 1994, is by far the most valuable asset of Barclays American, according to industry experts.
With interest rates on the rise, prepayments have slowed dramatically, driving up the value of servicing. At the same time, the dearth of current coupon production has sent many large players to the bulk market in search of servicing rights.
Based on recent servicing sales, market observers speculated that the portfolio could fetch as much as $240 million.
Norwest Corp. is among the parties bidding on the servicing portfolio, according to one source. A Norwest spokesman declined to comment.
The remaining assets of Barclays American, a servicing factory and a loan production network, could prove to be considerably harder to market, sources said. Because of declining mortgage volume and rampant price competition, few production franchises are running profitably.
Barclays produced $1.5 billion of home loans in the first half of 1994. About a third of that was generated by retail originations, with the remainder purchased from brokers and correspondents.
The interest from Norwest Corp. is ironic, observers say, because of the supporting role than bank played in Barclays American's downfall.
In 1989 Barclays negotiated a three-year agreement to buy servicing from Norwest Corp. on a flow basis, meaning as servicing rights are produced through loan originations.
The deal fueled phenomenal growth at Barclays: from a portfolio of $6.7 billion in 1989 to one of $28.4 billion in 1993. But, sources say, the deal locked Barclays into paying prices for servicing that soon were much above market. "A year after they did the deal, servicing went in the tank and Barclays was stuck paying high prices," said an observer.
But the worst carnage was saved for 1993, when dropping rates caused a huge runoff of loans because of refinancings - including many purchased from Norwest - forcing hundreds of millions in writedowns.