The big guys keep getting bigger, as more lenders sell their mortgage servicing portfolios.
In the latest industry consolidation, Commonwealth Bancorp of Valley Forge, Pa., announced that its subsidiary, Commonwealth Bank, would quit mortgage servicing by selling its Fannie Mae and Freddie Mac portfolios to National City Mortgage Co. of Miamisburg, Ohio.
The deal is expected to close in the third quarter and result in a pretax gain of $3.5 million to $4 million.
Charles H. Meacham, chairman and chief executive officer of Commonwealth Bank of Norristown, Pa., said the company started selling its new servicing and its conforming loans last year, largely because of the high premiums being paid.
The portfolio "was being priced in excess of what it was worth to us. We didn't feel we had the scale in the servicing business to be competitive," Mr. Meacham said. "We decided we didn't want to invest the capital to grow our servicing business."
Mr. Meacham said the move was part of a wider trend among smaller lenders. Don Kauth, a bank analyst at Deutsche Banc Alex. Brown, said lenders such as Commonwealth would see higher gains by selling servicing rather than retaining the loans.
"The megaservicers have an appetite for feeding the lion and are willing to pay high prices," Mr. Kauth said. "I certainly think you are going to see more sales of servicing from smaller players. The big servicers already have high costs in the sense that they can handle a very large portfolio, so they have to keep feeding it to remain profitable."
The increase in interest rates and the subsequent decline in refinancing have protected many servicing portfolios, and the market value of the servicing rights often exceeds their book value.
Servicing brokers say packages of conventional loan servicing have been trading at four to six times the servicing fee, which is typically 25 basis points.
Along with economies of scale, this trend has spurred industry consolidation as mortgage servicers decide to either become giants or leave the business.
Cendant Mortgage sold $14 billion of servicing to HomeSide Lending last month, and brokers estimated the deal at $183 million to $209 million.
HomeSide, based in Jacksonville, Fla., the seventh-largest servicer, has preferred partnerships. It has deals with BankBoston, Bank One, and People's Bank of Bridgeport, Conn. Those banks sold their entire servicing portfolios to HomeSide and committed to selling it the servicing rights on all future loan production.
Mellon Bank Corp. has put its $73.5 billion servicing portfolio on the block, and the fourth- and sixth-largest players, Chase Manhattan Corp. and Fleet Financial Group, are said to be among the final bidders. The portfolio could fetch as much as $1 billion.
Mr. Kauth said that about one-third of Commonwealth's portfolio was commercial and consumer loans, up from less than 20% a year ago.
"They have been trimming down their mortgage portfolio for a while," Mr. Kauth said. "They are in the midst of evolving from a thrift franchise to a commercial one."