Principal Residential Mortgage shares at least one belief with its neighbor Norwest Mortgage: Scale is crucial.
The subsidiary of Principal Financial Group, Des Moines, bought ReliaStar Mortgage last month, boosting its servicing portfolio to $40 billion and putting it among the top 20 mortgage servicers.
"In terms of servicing, you absolutely have to have scale to be able to compete," said Paul Bognanno, chief executive officer of Principal Residential Mortgage. "Scale economy is extremely important, and that drives us to grow our operation."
Excluding the ReliaStar purchase, Principal's servicing portfolio has been growing at 20% per year, and Mr. Bognanno would like to maintain that rate.
A key attraction for Principal was ReliaStar's relationships with 800 mortgage brokers nationwide, which were its sole origination channel. Principal originates loans through retail branches and correspondent lenders, but it had not done any lending through brokers.
"We didn't think we could continue to support our servicing portfolio without additional help," Mr. Bognanno said.
Help wasn't far away.
ReliaStar and Principal Mortgage are based in Des Moines, and both are subsidiaries of insurance companies in the Midwest. The deal, Mr. Bognanno said, "was based on a telephone call from our chairman to theirs" and did not require investment banks' help.
Terms of the sale, which closed late last month, were not disclosed. Investment bankers estimated that, based on the size of its servicing portfolio and annualized origination volume, a company like ReliaStar would sell for $120 million to $130 million.
Another selling point, Mr. Bognanno said, was ReliaStar's portfolio retention operation-telemarketers who reach out to customers likely to refinance, in order to prevent them from going to competitors.
Principal's telemarketing unit also does portfolio retention but has been distracted this year by other pursuits, including originating loans through Microsoft's HomeAdvisor and Intuit's QuickenMortgage web sites, he said.
"We put so much energy into the Internet channel that we were not getting as much portfolio retention as we could have," Mr. Bognanno said.
Principal originated $7.1 billion in 1997 and $7.6 billion in the first seven months of this year. Last year, it acquired $1.6 billion in servicing and since January has added another $1.3 billion-not counting the ReliaStar purchase.
By contrast, ReliaStar's servicing portfolio was only $7.5 billion.
Last year, ReliaStar Mortgage originated $1.5 billion; in the first half of this year it funded $1.2 billion.
"Our servicing portfolio wasn't big enough that we could enjoy the economies of scale and ancillary income that the big shops get," said Larry James, former president of ReliaStar Mortgage.
To get bigger would have required a major infrastructure investment that the parent, ReliaStar Financial Services, Minneapolis, was not willing to make.
ReliaStar Financial bought Citizens Savings Bank of St. Cloud, Minn., in January and renamed it ReliaStar Bank.
"The bank satisfied our need to provide mortgage lending services to our customers," said John Turner, CEO of ReliaStar Financial Services.
