Credit Suisse First Boston Corp. may soon join the growing list of major Wall Street broker-dealers with in-house mortgage servicing operations.
Select Portfolio Servicing Inc. (which until last fall was known as Fairbanks Capital Corp.) announced Friday that is has signed a letter of intent to sell itself to CS First Boston and its DLJ Mortgage Capital Inc.
The investment banking unit of Credit Suisse Group also agreed to sell Select the mortgage servicing rights on $6 billion of subprime loans on a flow basis over the next 12 months.
Select did not say how much CS First Boston would pay.
CS First Boston is one of Wall Street's largest "conduits" - companies that buy mortgages in the secondary market and package them into securities for their own portfolios and for sale to investors. The deal would give it more control over the performance of its mortgage holdings.
"This is a continued sign that broker-dealers with large mortgage desks or conduits are trying to vertically integrate," said Jeffrey Levine, a managing director at Milestone Merchant Partners LLC, a Miami company that handles mortgage mergers and acquisitions.
The logic of owning your own servicer is simple, he said. "If I'm someone with a big loan desk, I want to be in ultimate control of the performance of the assets that hold my name on them."
Conduits make the heftiest piece of their profits on deals is in the residual, or first-loss, portion, which they usually hold themselves. The performance of these investments can make or break the owner on any given deal.
And of course, "performance on their loans is important for future execution," said Diane Pendley, a Fitch Inc. analyst.
Mr. Levine said that instead of farming out its servicing to a third party, CS First Boston would be able to retain the profits from servicing its loans for itself.
The deal would get Select's majority owner, PMI Group Inc., out of the subprime servicing business. The Walnut Creek, Calif., mortgage insurer had invested in Select as a secondary line of business where it could use its expertise with defaults.
"PMI announced in 2003 that we would deemphasize the lender services segment of our business," said Brad Shuster, the president and chief executive officer of PMI Capital Corp. "In furtherance of this objective," PMI sold its interest in the Truman Fund in 2003, and in March of last year it sold American Pioneer Title Insurance Co.
Selling Select would "complete PMI's exit from lender services," Mr. Shuster said.
In entering the servicing business, CS First Boston would be following in the footsteps of Merrill Lynch & Co., Lehman Brothers, and Bear Stearns Cos. Merrill entered the business when it bought Wilshire Financial Services in mid-2004. Lehman owns Aurora Loan Services, while Bear owns EMC Mortgage Corp. in Irving, Tex.
Ms. Pendley said that CS First Boston's deal shows that Select is recovering from its troubles of a few years ago. Regulators investigated Select in 2003 for allegedly mistreating customers, among other things, and the plunge in its servicer ratings kept it from taking on new business.
After agreeing to a $40 million settlement that fall with the Department of Housing and Urban Development, the Federal Trade Commission, state attorneys general, and class-action lawyers, Fairbanks overhauled its consumer practices and sought to rebuilt its portfolio.
It is unclear yet how much of CS First Boston's production Select would get.
Kathy Tillwitz, another Fitch analyst, said the new business would be good for the servicer. Select, which still has a rating of 3-minus from Fitch, has been having "a little difficulty obtaining new product," despite the improvements it has made in its practices, she said. CS First Boston "could use that facility as a home for a great deal of their product."
However, it appears that Select would continue to provide third-party servicing for other companies, its specialty.
"Our intention at this point is to service loans from other organizations," even after the acquisition, said Craig Bullock, an executive vice president with Select.
