WAYNE, Pa. -- In moving to shed its servicing portfolio, Meridian Mortgage Corp. has signaled a dramatic shift in its approach to the home loan business.
Instead of producing loans and servicing them, the company plans to restrict itself to loan production, said David Sparks, vice chairman of Meridian Bancorp, the company's parent.
"The servicing side has been unprofitable for several quarters, and we felt it was time to focus on the profitable side of things," he said in an interview.
Loss Prompts Sale
Meridian announced earlier this week that it planned to sell its $6.8 billion servicing portfolio, following a $17.3 million loss by the mortgage unit.
Under the new strategy, Mr. Sparks said, Meridian Mortgage will sell both the mortgages it produces and the related servicing rights.
The right to service a mortgage is the valuable product at the center of the mortgage banking industry. Mortgage originators may either keep these rights, and earn fees through servicing, or realize revenue by selling them as they are created.
Pluses and Minuses
The idea of operating a mortgage bank that sells all servicing rights created has both positives and negatives, experts say.
"You will never make a fortune, but you can do well in terms of current income," said Stuart Feldstein, president of SMR Research, Budd Lake, N.J.
Mr. Feldstein says it's a good move if one believes that the market will experience repeated refinancing booms. However, Meridian will not be able to count on the cushion that a servicing portfolio provides when rates rise and originations slow.
Meridian says the step was economically necessary. "We didn't feel that we could achieve sufficient economies with a portfolio of our size," said Mr. Sparks. The company services $6.8 billion of loans.
The company wants to sell the servicing portfolio along with its Walla Walla, Wash., and Wayne, Pa., servicing centers. Meridian values its portfolio at around $34 million, though Mr. Sparks concedes that figure may not indicate what it will fetch.
As a result of the refinancing boom, the portfolio has had a runoff rate of 35% to 40% this year, according to Mr. Sparks. The portfolio has a weighted average coupon of 9.10%, which suggests it may be vulnerable to further prepayments.