North American Mortgage Co. has had its ups and downs over the last few years, whipsawed by changes in interest rates.
The company was even up for sale just two years ago.
But unlike many of its competitors, North American has survived as independent company. Today, it is continuing to perform solidly while pursuing a new business strategy. And the company that nobody wanted two years ago is again being mentioned as a possible takeover candidate.
In many ways, North American can now be looked at as a proxy for the mortgage business as a whole-solid and healthy if unspectacular, and moving in new directions.
It has, for example, entered into subprime lending along with many other lenders to bolster profits, and it is seeing a quick buildup of volume. In the company's report on operating statistics for March, John F. Farrell Jr., chairman and chief executive, said, "March 1997 fundings and applications for our subprime lending program more than doubled February's results, with March fundings of $19 million and applications of $53 million."
He added that the rollout of the subprime program was completed in March, suggesting opportunities for continuing volume growth.
In origination volume, too, North American may be a bellwether. The company's March report said that overall volume in March totaled $758 million, down about 11% from the level a year earlier. Applications edged up by a bit more than 1%, to $1.4 billion. Economists are expecting mortgage volume to slip by roughly 10% this year. But volume was stronger in the first half of last year, spurred by a miniboom in refinancings. So year-to-year comparisons could improve a bit as the year progresses.
North American's strategy includes selling servicing rights along with newly originated loans and holding on to only a small servicing portfolio.
In this way, the Santa Rosa, Calif.-based company departs from the mainstream. The wisdom in the mortgage business is that a servicing portfolio serves as a hedge against declining originations. As interest rates rise, volume falls but prepayments also slow down, making the portfolio more valuable. Thus, many regard a balance between the servicing portfolio and origination capacity as vital.
The other side of the equation is that, when rates are falling, refinancing volume accelerates, pushing total volume up, but prepayments drain the servicing portfolio.
Nobody is expecting such a scenario this year. The mortgage business appears to be in a period of stability, with a strong purchase market propping up value and rates remaining at a relatively low point. So the availability, or lack, of a natural hedge should make little difference.
Originations volume at Countrywide Credit Industries, the nation's largest independent mortgage company, showed similar patterns in March to those at North American.
The Pasadena, Calif.-based company funded $97 million of home equity loans in March 1997, more than triple the volume of March 1996. Subprime loan funding grew to $89 million, up about 17%. Overall originations, however, were down about 17%, to $2.96 billion.