Headlands Mortgage, Larkspur, Calif., will auction a large package of servicing rights on an unusual type of loan-jumbo mortgages with prepayment penalties.
The package will be sold on a "flow" basis, meaning the servicing rights will be transferred to the buyer as the loans are originated. The total size of the portfolio could be $600 million to $1 billion, depending upon how much Headlands originates.
Countrywide Servicing Exchange, a unit of Countrywide Home Loans, is handling the auction. Bids will be taken Tuesday.
The sale will be one of the first transfers of servicing rights on jumbo loans with prepayment penalties. Jumbos are loans that have balances of more than $227,150, making them too large to be bought by Fannie Mae or Freddie Mac.
Headlands will issue its first securitization of prepayment-protected jumbos next week. Bear, Stearns & Co. will act as lead underwriter for the $300 million offering. Generally, jumbo borrowers are more creditworthy than conventional borrowers, but also more likely to refinance when interest rates fall.
Headlands has been originating jumbos with prepayment protection for two months, said Steven Abreu, executive vice president of production and secondary marketing.
For 90% of the loans, Headlands imposes a penalty if the borrower refinances during the first five years. However, if the borrower sells the home, there is no penalty. In exchange for the prepayment penalty, the borrowers pay interest rates an eighth of a point lower than on comparable jumbos.
"This loan works really well in a low-interest-rate environment," Mr. Abreu said. It is attractive to borrowers who believe rates are unlikely to fall, he said.
Headlands expects to originate $1 billion of this product each year.