Norwest Corp. just can't get enough of the mortgage business.
Two years ago, the Minneapolis-based banking company came out of nowhere to join the top ranks of mortgage originators.
Now Norwest is starting to muscle in on another big part of the mortgage game -- loan servicing. This fee-based business entails funneling monthly payments from homeowners to holders of mortgage-backed securities.
Aiming for the Big Leagues
In just the first quarter of this year, the company's mortgage unit has increased its servicing portfolio by 30%, to $25.8 billion.
That puts Norwest Mortgage in a position to become one of the nation's top 10 servicers by yearend, up from No. 29 in the middle of last year and No. 160 in 1990.
The idea is to build up strong servicing income and, in the process, help shield the unit from the inevitable end of the nationwide boom in mortgage originations. The lending surge, triggered by the lowest interest rates in 20 years, is widely expected to subside when rates move up.
To Smooth the Cycle
"Originations are a fairly cyclical business," says Mark Oman, president of the Des Moines-based mortgage unit. "The revenue stream off of servicing can take the cyclicality out of mortgage banking."
Norwest is not the only big mortgage producer to embrace that view recently.
Margaretten Financial Corp., Perth Amboy, N.J., pumped up its servicing portfolio by 488% in the two years through March 31, to $14.7 billion. American Residential Holding Corp., La Jolla, Calif., boosted its servicing portfolio 596% over the same period, to $9.8 billion.
Just last week, PNC Bank Corp., announced plans to quadruple its mortgage servicing portfolio, to more than $36 billion, by purchasing the mortgage banking businesses of Sears, Roebuck & Co. PNC said it was lured by the attractive fee income that servicing can yield.
Servicers typically earn annual fees equal to 0.25% to 0.50% of the loans handled.
In addition to tending to monthly payments, the companies administer escrow accounts for homeowners' property tax and insurance payments. Also, when necessary, they administer foreclosure proceedings.
For Norwest, the push into servicing represents a homecoming of sorts.
In the early 1980s, Norwest Mortgage was one of the nation's largest servicers. But after suffering heavy losses selling mortgages on the secondary market, the unit sold its entire servicing portfolio to the mortgage unit of General Motors Acceptance Corp.
As part of the deal, Norwest agreed to sell to GMAC the servicing rights attached to its new loans for the next four years. GMAC wanted a guaranteed flow of rights to establish its servicing business and Norwest no longer had the capacity to service mortgages.
In mid-1989, when the agreement with GMAC ran out, Norwest was still not ready to hold onto any servicing. So it cut a deal to sell new servicing rights the mortgage unit of Barclays Bank PLC for the next three years.
The Barclays Deal
With Norwest turning up the heat in originations, the deal soon made Barclays one of the fastest-growing servicers in the country.
Norwest boosted its loan production by a full 100% in 1990, then by another 50% in 1991, to $13.2 billion. That made the company the nation's biggest mortgage lender.
(Though Norwest's originations climbed to $21 billion last year, the company slipped to No. 3, after nonbank powerhouses Countrywide Credit Industries and Prudential Home Mortgage.)
The Barclays deal was designed to let Norwest keep an ever increasing share of its new servicing rights - and Norwest has done just that.
This year, the company is keeping nearly all the rights, Sees no match,for his portfolio sparking the explosive growth in its portfolio.
Norwest executives seem only too happy to keep up the pace. They suggest that the portfolio could hit $40 billion by yearend.
Though other companies still boast bigger servicing businesses, Mr. Oman insists his is the best. "There just isn't another portfolio out there that can match" it, he says.
He says that the average mortgage serviced by Norwest has an interest rate of just 7.9 1 %, making it less vulnerable to prepayment than older, higher-rate loans managed by more established servicers.
Under a commonly used rule of thumb, market rates on basic mortgages would have to drop to to under 6.5% - from the current 7.5% - before many of Norwest's loans began to prepay. Such a decline is considered unlikely, given that rates already are so low.
High Credit Quality
Norwest also reports high credit quality on its servicing portfolio. Only 1.4% of the loans are 30 days or more past due: the industry average is 4.24%.
Richard Malloy, who heads up the servicing effort, acknowledges that the portfolio is still "very young." Mortgages typically don't sour for at least three years, many experts say.
But Mr. Malloy said he hopes to keep the delinquency rate from climbing by adding more high-quality loans.
Weathering a Rate Rise
Most analysts agree with the theory that a large, high-quality servicing portfolio can help a mortgage company weather a sustained rise in interest rates.
Though origination fees dwindle, prepayments slow down, which makes servicing rights more valuable. If need be, servicers then can boost earnings by selling rights selectively.
The protection, however, is not complete.
"Nobody can dance out of the way of an interest rate spike," says Hunter Wolcott, president of Reserve Financial Management, a Miami-based servicing brokerage.
Still, if anybody can rumba with the rates, it just might be Norwest.