Troubled Capstead Mortgage Corp. is for sale, according to industry sources.
The real estate investment trust, based in Dallas, has been battered by the effects of falling interest rates, and its stock price has plunged in the last six months. Merrill Lynch & Co. has been shopping the company around to prospective buyers, the sources said.
Christopher Gilson, president and chief executive officer of Capstead Inc., the company's mortgage banking subsidiary, would not comment on the deal talk, citing company policy. Merrill Lynch did not return phone calls.
Some observers said Capstead's chief selling point is its high-tech platform, which lets it service loans at a very low cost.
"The people who are interested are either new entrants to the business or people who are in the business but need the platform," said an investment banker who did not want to be identified.
However, James J. Fowler, an analyst at NationsBanc Montgomery Securities, said Capstead's $40 billion servicing portfolio was its most attractive asset and the most likely buyer would be a servicing giant.
"It surprises me that somebody would want to get into the business that's not in it currently," he said.
Investment bankers said the platform would probably command no more than $10 million. The servicing portfolio would sell for four to five times the 25-basis-point servicing fee, or $40 million to $50 million, brokers said.
Servicing-the business of collecting payments, mailing statements, and otherwise administering mortgage loans-is considered a risky asset when rates decline because borrowers refinance their mortgages, eliminating the fees the servicers would have collected. But it is considered valuable because of the potential to cross-sell.
Capstead is something of an anomaly among mortgage servicers because it does not originate loans. In June, Capstead wrote down the value of its servicing portfolio by $45 million. On top of that, it sold its mortgage- backed securities at a loss of $255 million.
The company had bought derivative instruments to hedge against any decline in the value of its servicing, but "these instruments have underperformed relative to the change in value of the servicing portfolio," its latest 10-Q filing with the Securities and Exchange Commission said.
"We weren't trying to protect 100% of the value" of the portfolio, said Andrew F. Jacobs, executive vice president for finance at Capstead Mortgage. "Anyone who protects 100% is not going to make any money."
Mr. Jacobs also refused to discuss the possibility of a sale of Capstead.