BankAtlantic Bancorp is the latest mortgage lender to write down its servicing portfolio because of falling interest rates.
The Fort Lauderdale, Fla.-based thrift's $15 million writedown, announced Monday in its third-quarter earnings statement, follows a $250 million accounting adjustment by BankAmerica Corp. on its mortgage servicing assets two weeks ago and a $45 million adjustment by Capstead Mortgage of Dallas in June.
Servicing is the business of collecting payments, mailing statements, and generally administering mortgage loans.
Accounting rules require mortgage bankers to book the servicing rights on loans they originate or acquire according to assumptions about the speed at which the loans will pay off. If those assumptions change, or if actual prepayments are faster than expected, the servicers have to write the assets down.
Mortgage servicing has recently been costing BankAtlantic "as much as $1 million per month in earnings," said Alan Levan, the company's chairman and chief executive officer. "As early as the first quarter, we started to see significant runoff."
The writedown, Mr. Levan said, represents "an attempt to slow up the amortization process that's been on our books. Unless we see a significant pickup in prepayments, it should have the effect of neutralizing these losses going forward, returning the servicing operation back to profitability."
Since 1995 it has been routine for mortgage bankers to protect their portfolios by buying derivative instruments that tend to rise in value when interest rates fall, to offset declines in the value of servicing.
"For the most part our portfolio was not hedged," Mr. Levan told American Banker. "Hedging on a portfolio is expensive, and it's not a perfect science."
Gary Ford, an analyst at Southeast Research Partners of Boca Raton, Fla., said, "They felt their operation was not big enough to warrant the expense of implementing a hedge program. Now they may wish they had hedged."
Part of BankAtlantic's strategy was to buy small packages of servicing rights, aggregate them, and then resell them in larger bundles, which command better prices. The bank maintains a relatively small $4 billion portfolio.
Many mortgage bankers also employ a "macro hedge" strategy of running a large origination business to replenish their servicing portfolios.
BankAtlantic has been originating $100 million of loans per month. But that was not sufficient, Mr. Ford said, "because they're in the business of buying and reselling servicing."
Mr. Levan said the writedown was based on Wall Street prepayment forecasts as of Sept. 30. Since then, prepayment analysts have changed their predictions, expecting slower prepayments.
Had BankAtlantic used those updated forecasts, the writedown would have been much smaller, Mr. Levan said.