After months of speculation, Cendant Corp. acknowledged Thursday that it wants out of the mortgage business — but not completely.
Fears about the earnings volatility associated with mortgage banking have weighed heavily on the New York conglomerate’s stock. But unlike Principal Financial Group Inc., the insurer that recently sold its mortgage unit to Citigroup Inc., Cendant has a proven cross-selling model.
Henry R. Silverman, its chairman, chief executive, and president, said it does not want to lose the “value circle” created by offering mortgages along with realty, relocation, and settlement services.
“Our company will always participate in the mortgage business, because of its leading position in the residential real estate market,” he said in a press release announcing that Cendant would explore its options, including a sale of its mortgage production and servicing operations.
Observers said there were two obvious routes Cendant could take. One would be moving part of the origination platform into a joint venture in which Cendant would keep a stake. The other would be a deal in which Cendant would sell the unit but remain in the mortgage industry as a broker, perhaps by forming an alliance with the unit’s buyer.
Mr. Silverman hinted that he was open to such arrangements when he said Cendant wanted “a solution that reduces our company’s exposure to traditional mortgage banking.”
However, observers said Cendant is unlikely to hold on to its servicing business.
Thomas H. Meyer, the president of Homebuilders Financial Network LLC, a Miami Lakes, Fla., company that runs brokerages for builders, said being a brokerage removes some of the risks related to interest rates. A brokerage does not need to hedge its pipeline, but it shares with mortgage banks the worry that rate movements, and the resulting changes in volume, will leave it over- or understaffed.
While rates have generally been rising, they have been on something of “a roller coaster ride,” which some lenders “are much better prepared to manage” than others, Mr. Meyer said.
However, he agreed that it would make little sense for Cendant to get out of the mortgage business completely. “You’ve got feeder channels that represent a gold mine in terms of potential mortgage customers.”
Cendant’s realty business, estimated to be involved in at least a quarter of all home sales, includes brokerages it owns and franchise brands like Coldwell Banker, Century 21, and ERA.
Rising values for servicing rights and a need for more production, especially purchase business, may increase the value of Cendant Mortgage, of Mt. Laurel, N.J. But observers said its parent could have trouble finding a good fit.
BlackRock Inc. and Goldman, Sachs & Co. are advising Cendant Corp. on its options.
Some said the unit might be less attractive to a large financial services company, because an acquisition by a competitor might worry its big private-label outsourcing clients, such as Merrill Lynch & Co., Charles Schwab Corp., and American Express Co.
And a sale to a company with a realty arm, like General Motors Acceptance Corp., could scare Cendant agents or franchisees from using the lender, even if it retained some link with Cendant.
Jeffrey Levine, a managing director at Milestone Merchant Partners LLC, a Miami firm that handles mortgage mergers and acquisitions, said Cendant could overcome these hurdles.
“At end of the day, any buyer that’s going to look at this is going to be equally sensitive to these concerns and find a way to structure a transaction appropriately,” he said.
In the first quarter Cendant was the eleventh-largest originator, funding $11.3 billion of loans, and the tenth-largest servicer, managing a $140 billion portfolio, according to National Mortgage News.
During an April conference call, Mr. Silverman denied rumors that Cendant was close to selling its mortgage business to Countrywide Financial Corp.
In a report last month, Chris Gutek, an analyst at Morgan Stanley, wrote that Mr. Silverman’s remarks seemed to indicate his company was leaving the “door open for negotiations with other key mortgage players.”
The mortgage business, which gets about 70% of its volume from outsourcing clients, should be worth about $1 billion, according to Mr. Gutek.
Cendant’s shares rallied 3.2% Thursday. Steven Kent, an analyst at Goldman Sachs, wrote in a note that having “an eventual sale of its decelerating mortgage operations appear more imminent” contributed to the boost. (Also Thursday, Cendant raised its second-quarter earnings guidance.)
