Wells Fargo & Co. became the latest bank to exit the mortgage servicing business when it said late Thursday that it would sell its $28.1 billion portfolio to a unit of General Motors Acceptance Corp.
Financial terms were not disclosed, but recent deals suggest a price tag of around $300 million. The transaction is expected to close in June.
The deal, coming less than 24 hours after a similar retreat by Banc One Corp., underscored the profit pressures even large servicers face amid a refinancing boom that is stripping volume from portfolios.
Servicers are watching their portfolios shrink as rate-savvy borrowers prepay loans-and are being driven into the cutthroat open market to maintain volume.
Wells Fargo was especially vulnerable, because it quit originating mortgages in 1995 and thus could not easily replenish its portfolio.
"Even though we were an efficient servicer, we couldn't continue to grow" without acquiring servicing rights, said Dick Schliesmann, an executive vice president at Wells Fargo. And such acquisitions have been costly and hard to come by in the past year.
Wells ranked 18th among mortgage services at midyear 1997, the latest period for which data are available.
Larger servicing portfolios offer increasingly better economies of scale in an already thin-margin business. And because Wells wasn't producing loans, it had a "decaying asset," said Brenda White, managing director at UBS Securities. The bank "looked at the returns and decided that they weren't attractive enough," she said.
Unlike Wells Fargo, Banc One-which announced earlier on Thursday that it would sell its $18 billion portfolio to HomeSide Lending for $201 million- was still originating mortgages. But the bank saw its 28th place ranking among servicers as an insurmountable disadvantage.
The acquirer of the Wells Fargo portfolio, GMAC Mortgage of Horsham, Pa., would climb four rungs, to 8th place among servicers, and its portfolio would top $100 billion.
The deal caps GMAC's long-stated goal to grow its servicing operations to one million customers, said Tom Donatacci, GMAC's vice president of servicing acquisitions. He said the company plans to retain Wells' employees, including its top management, and its National City, Calif.- based servicing center.
Observers are predicting a spate of similar sales in the next 12 months.
Running a successful servicing operation is becoming more and more difficult, they say, with success coming to a few select megaservicers who know how to achieve efficiencies of scale while effectively hedging and cross selling the portfolios.
The size of servicing transactions in the last few years speaks to the difficulty of competing, said Ed Elanjian, managing director at Cohane Rafferty Securities, Harrison, N.Y., which advised both HomeSide and Wells Fargo on their deals. "Banc One had made a big technology investment, but still couldn't keep up," he said.
Still, not all servicers are convinced that size is the ultimate determinant of success in mortgage servicing.
PNC Mortgage, which ranks 16th among servicers with $40 billion, said Friday morning that it would buy $2.7 billion in servicing rights from Ryland Mortgage Co., Columbia, Md. Terms were not disclosed.
Sy Naqvi, president of PNC Mortgage, said his company is generating solid profits because of proper hedging techniques. Many mortgage companies, he said, are under pressure because they did not cushion their portfolios for the refinancing boom. He said he expects PNC to continue buying other portfolios.
Improper hedging was not an issue in the Wells transaction, but is likely to loom large in future deals, said Bill Curley, president of Cohane Rafferty Securities.
Banks that have not hedged properly are starting to notice problems as their portfolios shrink, Mr. Curley said.
The January 1996 adoption of new accounting rules brings the hedging issue to the foreground, observers say. The rules, known as FAS 122 and FAS 125, allow companies to value their servicing rights themselves and apply profits the loans will bring in immediately to their balance sheet. Prepaying loans throw off those assumptions.