NationsBank Corp., taking the home-loan industry by storm, is buying the mortgage servicing business of Keycorp for $350 million.
The deal, announced Thursday, marks NationsBank's second big mortgage acquisition of the week. On Wednesday, the company said it would buy part of Michigan's Source One Mortgage Servicing Corp. The price of that deal is estimated at more than $150 million.
When the two acquisitions are completed, NationsBank will be one of the top five servicers in the country, processing monthly payments on some $75 billion of loans. The Keycorp acquisition involves the servicing of $25 billion of loans; the Source One deal pertains to $10 billion of loans.
The purchases show how a handful of big commercial banks are jumping to the forefront of the mortgage industry through repeated acquisitions.
While some banks have pulled back from the field, giants like NationsBank, Norwest Corp., and Chase Manhattan Corp. have displayed voracious appetites.
Recent deals by these companies have accelerated a consolidation of the servicing business, which is the backbone of mortgage banking. Servicers earn fee income by funneling monthly payments from homeowners to holders of mortgage-backed securities.
The nation's top 25 mortgages servicers now handle more than 27% of all home mortgages - roughly double their share of five years ago.
"The servicing business is one area that is susceptible to economies of scale," said Leon T. Kendall, a professor at Northwestern University's Kellogg School of Management.
"NationsBank and Keycorp are different sides of the same coin,"said Dennis Shea, an analyst at Morgan Stanley & Co. NationsBank, he explained, clearly wants to attain economies of scale. But Keycorp "realizes that it would have to invest an awful lot of money to play with the big boys."
In bidding for Keycorp's servicing business, NationsBank faced stiff competition from Chase and General Electric Capital Corp., according to sources familiar with the deal.
NationsBank, they said, won partly because it was willing to buy not only a servicing portfolio but a servicing facility outside Buffalo. The operation employs about 500 people.
The purchase from Source One Mortgage Servicing was of servicing rights alone. While no price was announced, industry observers pegged the likely value at $160-175 million.
Source One commanded a higher premium for its servicing, because the loans have a relatively low average coupon rate of 7.22%. Servicing on such loans is more valuable because the loans are less likely to be paid off early.
In the past year, NationsBank purchased an Arizona servicing business with a $6.5 billion servicing portfolio, plus a small originations network in California.
Norwest, meanwhile, has stepped up for three large buys totaling more than $500 million; Directors Home Mortgage, Michigan National Bank's mortgage unit, and a major portfolio belonging to Barclays Bank.
Though Keycorp is exiting the servicing business, it will continue to originate home loans in its offices across the country, said chairman and chief executive Victor J. Riley Jr. He cited issues of scale and investment.
Keycorp expects to get a pretax gain of $70 million to $75 million from the sale, according to analysts.
Initially, Keycorp wanted to sell its wholesale and correspondent mortgage lending divisions along with the servicing business, but those assets failed to attract bidders, according to sources familiar with the deal.
With mortgage volume sagging, would-be sellers of production operations, including Bank of New York Co., have met chilly receptions.
Keycorp will close its wholesale and correspondent divisions and scale back secondary marketing, resulting in the loss of about 250 jobs nationwide, according to a bank spokesman.
Salomon Brothers represented Keycorp in the sale while NationsBank was aided by Bear, Stearns & Co.