An affiliate of Mortgage Guaranty Insurance Co. is auctioning off a servicing portfolio of close to $1 billion.
The portfolio belongs to a Midwest community bank that is bailing out of mortgage banking, said Michael Zimmerman, vice president for capital markets operations at MGIC Investor Services Corp.
Mr. Zimmerman would not disclose the seller's identity, but its story is familiar: It got into mortgage banking several years ago only to find it couldn't build the scale it needed to compete.
The bank is selling all its servicing except on the loans it holds in portfolio. "They decided to follow a more traditional retail consumer bank strategy," Mr. Zimmerman said.
The $988 million portfolio consists of loans guaranteed by Fannie Mae and Freddie Mac. The weighted average coupon is 7.44%.
The price of such servicing has fallen with the latest drop in interest rates. Because many loans are prepaid when rates are low, the value of servicing these loans falls.
Conventional servicing rights generally trade at lower prices than servicing for Ginnie Mae loans because of greater prepayment risk. Servicing brokers said any conventional package with an average interest rate above 7% is a tough sell right now.
Nevertheless, MGIC said it expects at least six and as many as nine bidders for the community bank's portfolio. Its delinquency rate is 1.2%, much lower than the industry average of 2.91% reported last week by the Mortgage Bankers Association of America.
Moreover, more than 85% of the loans are in the Midwest, many in the Chicago, Milwaukee, or Minneapolis areas. Mr. Zimmerman said other Midwest institutions may see the portfolio as a means to acquire profitable banking relationships.
For example, with house prices on the rise in Chicago, owners might be persuaded to take out home equity loans, Mr. Zimmerman said.
Another key selling point is that more than 85% of the loans were made to homebuyers. That, Mr. Zimmerman argued, means the portfolio is less likely to prepay than one comprising mostly refinanced loans.
"A refi loan has a much shorter life than a purchase loan," Mr. Zimmerman said. "Once the borrower has determined how easy it is, he or she starts pulling the trigger much faster."
He said he expects the package to fetch five to 5.5 times the servicing fee, or $12.8 million to $14.3 million. Bids are due next week.