A marketing battle is shaping up in the high-stakes world of providing technical muscle to home loan servicers.
Computer Power Inc., which has long dominated the sector, will soon have to reckon with competition from Prudential Insurance Corp. of America.
Prudential, though its Clayton, Mo., subsidiary Residential Services Corp. of America will buy Lomas Information Systems, a unit of Lomas Financial Corp., Dallas. Lomas Information has been, along with Data-Link Systems Inc., one of the few competitors of CPI in providing technical support to service hundreds of billions of dollars of mortgage loans. And now, with big money behind it, Lomas Information may find itself better able to compete.
The unit had been a big loser for Lomas Financial, hemorrhaging cash at a rate of about $13 million to $14 million in the company's last fiscal year.
Though terms of the deal were not announced, sources maintain that the deal calls for a payment mixture of cash and securities. Part of the payment will be a discounted note against which ongoing losses at Lomas Information will be credited. Prudential has made internal estimates that Lomas Information will lose $20 million to $25 million over the next 18 months, according to a source.
The essential problem at Lomas Information is simple: it has never been able to attract enough clients to pay the bills.
Lomas has estimated that it needs 2.4 million loans on the system to get into the black, double the 1.2 million it currently services. Prudential believes it can make the unit pay with fewer loans than could Lomas, though it declined to name a number.
"We believe that we can bring substantial economies to Lomas Information Systems. We can eliminate redundancies as well as bring a lower cost of funds," said Larry Swedroe, vice chairman of Residential Services Corp.
However, Prudential was greeted with a bit of bad news last week when it learned that Lomas was loosing its single largest outside account. As expected, PNC Mortgage Corp. informed Prudential that it was going to convert the 300,000 loans it acquired from Sears Mortgage to from Lomas to CPI.
Prudential will offset that loss by converting its own 500,000 to 550,000 loans to Lomas from CPI, a process that should be completed by next summer.
That still will leave the Lomas system short, and Prudential will then go out and market the service to the industry.
More importantly than its massive loan portfolio, Prudential will be able to bring its financial strength and stability to the table.
According to Mr. Swedroe and others, Lomas' instability was a turnoff for many potential clients, leaving a relatively open field for Computer Power. "They felt that Lomas might not be there in the long run," said Mr. Swedroe.
"I think the competition will be good for the industry," said Joseph Bryant, head of mortgage lending at Long Island Savings Bank. "Computer Power has been the Cadillac of the industry, but they have charges Cadillac prices ."
Also fueling the competitive fires may be the trend toward consolidation in the mortgage industry.
Prudential thinks this may work to its advantage.
"There will be capacity issues with the very large numbers of loans for the mega-mega servicers," said Mr. Swedroe, noting that he saw no ceiling in his system's capacity.