Bullish Times Spur Mortgage Firms To Ponder Initial Public Offerings

The boom in mortgage banking is leading some companies to consider issuing stock to the public.

Their model is Countrywide Credit Industries, the only big mortgage company with publicly traded shares. The California company has seen its stock skyrocket to about $34, from $8.75 at the beginning of the year.

"I know of at least three companies that are considering this," said a senior mortgage executive at one big bank.

While no offerings are known to be imminent, there is no question about the bullishness that has washed over mortgage banking this year. (See rankings of mortgage companies, starting on page 10.)

Favor for Fixed Rates

Despite weak housing markets, loan originations at mortgage banks are booming. That's because low interest rates have boosted the popularity of fixed-rate mortgages -- the companies' main product. Thrifts, meanwhile, are languishing, as consumers avoid their mainstay adjustable-rate loans.

According to an American Banker survey, mortgage companies are enjoying a hefty increase in loan-servicing activity, the backbone of their business.

The upbeat mood will come into full view this week as the Mortgage Bankers Association of America gathers in Dallas for its annual convention. Fittingly, the group will install Angelo R. Mozilo, the chief executive of Countrywide, as its president for the coming year.

In a speech to be delivered today, Mr. Mozilo will call on bankers to parlay their heightened status into greater clout with policymakers.

"We have earned our place in the sun," Mr. Mozilo says in his prepared remarks. "We have earned the respect of our peers and the attention of those who would govern us. And we are now ready to be rewarded."

Want to Reduce Requirements

Among other things, mortgage bankers are clamoring to have the government reduce downpayment requirements for loans insured by the Federal Housing Administration, as well as to allow borrowers to finance all closing costs.

Mortgage banking companies generally originate fixed-rate mortgages and sell them into the secondary market, which minimizes interest rate risk. They then earn fees by servicing the loans - funneling monthly payments from homeowners to holders of mortgage-backed securities.

Many of the largest mortgage companies are owned by public banks and thrifts, but that does not rule out the possibility of stock offerings. Experts say capital-strapped banks and thrifts may be very tempted to sell minority or even majority positions in their mortgage units.

Credit Card Spinoffs

One variation of this has already occurred in the credit card market. MNC Financial Corp., Baltimore, spun off its highly regarded credit card business, MBNA Corp., through a public offering in January. The capital-starved banking company spun off its $6 billion card portfolio after failing to fetch the price it was asking in the conventional market.

Mortgage banking companies, for their part, have good reason to think about a public offering. If they can increase equity, their debt ratings will rise and their funding costs will consequently fall.

With that in mind, Countrywide - which went public in 1969 - made two offerings of stock this year. Even with dilution, its shares are trading at a stunning 24 times earnings.

Large regional banks, by contrast, generally trade at around nine times earnings.

Big-Company Profits Soaring

"Investors seem to be saying that they want a way to invest in mortgage banking," said Bruce Harting, a thrift-stock analyst at Salomon Brothers.

Who could blame them? The combined profits of five major mortgage companies jumped 68% last year and continue to rise this year, according to SMR Reasearch, Budd Lake, N.J.

Meanwhile, most large mortgage companies continue to get bigger. As of June 30, the top 25 servicing concerns were processing monthly payments on about 21% of all home loans, up from 19% a year earlier, according to this paper's survey.

In addition to growing through originations, some big companies have been buying large amounts of servicing rights from other lenders.

The mortgage unit of Chase Manhattan Corp., for example, saw its total servicing portfolio jump 35% in the first half of this year to $32 billion. Deals in progress should bring another $5 billion of servicing to Chase within the next few months, a bank official said.

New Stars on Horizon

As megamergers unfold in commercial banking, some new servicing stars are sure to appear.

The combination of NCNB Corp. and C&S/Sovran Corp., for example, should produce the nation's sixth-largest servicer.

Meanwhile, the government's efforts to sell dead thrifts and their mortgage units is attracting a host of new players, some with highly ambitious agendas.

New entrants include the likes of Cargill Inc., the commodities giant; Sid and Lee Bass, the Texas billionaires; and James Tang, a trained astrophysicist operating with backing from investors in Hong Kong.

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