Express America Mortgage Corp. has taken a $15 million writedown of purchased mortgage servicing rights, the company announced late last week.
As a result of the speeded-up amortization schedule, the Phoenix-based mortgage bank, formerly Wesav Mortgage, reported a loss of $2.1 million for the fiscal year ended Sept. 30.
A total of $6.6 million of the charge is an amortization allowance for loans that have already run off, while the remaining $8.4 million is a provision for future runoff.
"We took the charge because we decided we wanted to make sure we had the bad news behind us," said James Reis, chief financial officer.
Prepayments Speed Runoff
In taking the loss Express America becomes the latest in a string of mortgage banks to suffer losses in coming to terms with servicing runoff caused by prepayments.
Recently Lomas Financial took a sizable hit to its balance sheet when it wrote down $50 million of servicing rights. Earlier this year Fleet Mortgage Group and Margaretten Financial suffered the same fate.
Because mortgage banks take the expected income from purchased servicing on the books as a gain when they buy it, they are obliged to write down part or all of the gain if the asset fails to perform as anticipated, usually because of prepayments.
The runoff in Express America's portfolio was concentrated in the servicing that was purchased when the company came out of Resolution Trust Corp. conservatorship two years ago, according to Mr. Reis.
The loans, which had interest rates much higher than current market, "are obviously not going to stay on the books as long as we thought they would," he said.
Loans ran off Express' books at a 31% annual clip last quarter, a steep climb from previous levels. With the $8.4 million set-aside for future runoff, the company can withstand a runoff rate in the "high 20s" going forward, a level that Mr. Reis feels is on the high end.
Servicing Portfolio Grows
Express America, which buys all its mortgages from brokers, had originations of $4 billion in the last fiscal year.
Despite high runoff, the company was able to build its servicing portfolio to $6.8 billion, up from $3.8 billion last year.
The board of directors of Express America Holdings Corp., the parent company, have authorized a program to buy back 500,000 shares of common stock.