The handful of mortgage-related businesses that Bank of America Corp. would get from buying Merrill Lynch & Co. Inc. might look redundant after its July purchase of Countrywide Financial Corp., the nation's largest home lender and servicer.
But some observers said Monday that one or both of Merrill's two subprime servicing units might help B of A work through the problem loans it got with Countrywide.
B of A's deal, announced Monday, to buy Merrill for $50 billion of stock could also prompt a phasing out of the brokerage company's relationship with PHH Corp., analysts said. Merrill Lynch Credit Corp., a unit in Jacksonville, Fla. that makes prime jumbo mortgages for the brokerage's clients, has outsourced much of the work to PHH for at least 10 years. But Countrywide's capabilities would make such outsourcing unnecessary after Merrill's contract with PHH expires in 2010, observers said.
Bank of America quit most subprime mortgage lending in 2001, and since then, its chairman and chief executive officer, Kenneth Lewis, has sounded tepid at best about the business. In February of last year, he said that a return by B of A to subprime "may happen but probably not in my lifetime." In mid-2006 he talked about exploring a return to subprime "in a careful way."
However, the Countrywide acquisition brought back subprime exposure on the servicing side of the mortgage business. According to National Mortgage News, Countrywide serviced about $100 billion of subprime loans as of June 30.
In a securities filing last month, Countrywide said the delinquency rate in its subprime servicing portfolio jumped nearly 9 percentage points from a year earlier, to 28.9% at midyear. The share of loans in this portfolio that were in foreclosure more than doubled, to 8.55%, during the same period.
Industry sources said Monday that Merrill's two servicing units — Wilshire Credit Corp. in Beaverton, Ore., and Home Loan Services Inc. in Pittsburgh — have room to take on additional loans.
"I would think that, if B of A wanted to, it would be an effective way of getting additional capacity for the old Countrywide loans," said Phillip Comeau, the head of Synergystic Associates Inc., a mortgage industry consulting firm in Great Falls, Va.
David McDonnell, a founder of Statebridge Co., a special servicing start-up in Denver, said B of A "should probably keep Wilshire Credit intact" because it is "a needed platform in today's market."
Wilshire Credit and Home Loan Services would give B of A platforms on both coasts at a time when the servicing industry is consolidating, leaving few choices for lenders looking to work through their problem loans, Mr. McDonnell said. "Eventually, they might consolidate everything and put it into one system."
Fitch Inc. gives Wilshire Credit its highest ratings for servicing subprime and defaulted loans, "based on the company's experience in managing and liquidating nonperforming loans and real-estate-owned assets." Fitch gives lower marks in these areas to Home Loan Services.
In a review last month, the rating agency cited Wilshire's "experienced and tenured management team, integrated technology platform, and continued solid default management and loss mitigation practices."
Wilshire "maintains … extensive workout capabilities," it said.
National Mortgage News reported that Countrywide and the two Merrill units together serviced nearly $154 billion of subprime loans, or about 15% of that market, at June 30.
Home Loan Services handled $39.8 billion of such loans. The unit is a remnant of First Franklin Financial Corp., the San Jose subprime lender that Merrill bought from National City Corp. for $1.3 billion in 2006, at the height of the mortgage boom.
In March, Merrill said that it was discontinuing originations at First Franklin and that it would try to find a buyer for Home Loan Services. But by last week it had taken the unit off the market.
Dennis Stowe, the president of Residential Credit Solutions Inc., a buyer and servicer of distressed mortgages, said that B of A may be likely to keep Wilshire Credit as a special servicer to work out delinquent Countrywide loans.
However, Home Loan Services could "go back on the market again" because it is "a redundant platform," he said.
PHH in Mount Laurel, N.J., got roughly 20% of its originations last year, $8 billion worth, from Merrill Lynch mortgage lending and servicing agreements.
Paul Miller, an analyst at FBR Capital Markets, a unit of Friedman, Billings, Ramsey & Co. Inc., downgraded the shares of PHH Monday on the expectation that B of A would "phase out" its agreements at the end of 2010.
A spokeswoman for PHH declined to comment.