First Franklin Financial Corp., one of the largest privately held mortgage banks, is in the final stages of selling itself to DLJ Merchant Banking, a top First Franklin officer said.

No agreement has been signed, said First Franklin president William Dallas, but one is likely "in the next several days." Mr. Dallas will remain as president of the company and its headquarters will remain in San Jose, Calif.

The purchase price will not be made public, but the deal is thought to be valued not far above $40 million, which would be about 1% of First Franklin's $4 billion servicing portfolio.

The sale of First Franklin would be yet another sign of the growing uncertainty and discomfort among moderate-size mortgage banks.

"This will give us the ability to fully expand our lending operations throughout the country," said Mr. Dallas, pointing out that DLJ could provide him with the capital strength needed to grow.

Because of its size and its concentration in California and in wholesale lending, First Franklin has been thwarted somewhat in its desire to continue growing.

If the sale goes through, First Franklin, which now originates about $300 million of mortgages a month, may get a lot bigger very quickly. That's because DLJ Merchant Banking, the venture capital arm of Donaldson, Lufkin, Jenrette, already owns a mortgage bank in Virginia, called, coincidentally, Franklin Mortgage Capital Corp.

It is likely, according to Mr. Dallas, that there will be some sort of marriage or alliance between his company and the Falls Church, Va.-based Franklin Mortgage.

Franklin Mortgage originated about $4 billion of loans and last year had a servicing portfolio of $1.6 billion.

At first glance, the geographic match is a good one. First Franklin operates in California as well as Washington, Oregon, Colorado, and Texas. Franklin Mortgage Capital is mostly in the Middle Atlantic states as well as the Southwest.

Trend Foreseen

Experts think the First Franklin sale could be emblematic of a wave of midsize mortgage banks seeking protection in the arms of a well-capitalized suitor. "There has to be 25 mortgage banks out there in a similar position," said a mortgage banker.

Mortgage banks like First Franklin, which got about 80% of its volume last year from refinancings, are faced with some tough choices in 1994.

Because volume has dropped, pricing is terrifically competitive, according to Jonathan Gray, an analyst at Sanford C. Bernstein & Co., and he believes pricing may weaken further.

Because of this, companies like First Franklin are hungry to break into retail or develop other means of originating loans.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.