Refi Boom, High Costs A Fatal Combination For Failed Pa. Lender

A recent bankruptcy case illustrates the risks for mortgage servicers that can't keep a lid on costs or replenish their portfolios.

Fidelity Bond and Mortgage Co. of Blue Bell, Pa., filed for Chapter 11 protection this month.

It failed largely because of inefficiencies in its servicing platform, said people close to the small, privately owned company.

The problems included high rent and expensive computer-support contracts that the company could not easily get out of, the sources said.

In May 1998, Fidelity Bond merged with Phoenix Mortgage Co., a Fort Washington, Pa., lender that originated about $200 million of loans a year.

As part of that deal, Republic First Bancorp, the holding company of First Republic Bank in Philadelphia, took a 47% stake in the mortgage company.

At that point, Fidelity Bond serviced over $630 million of loans.

But the biggest refinance boom in history, in which homeowners rushed to take advantage of falling interest rates, eroded many servicers' portfolios, including Fidelity Bond's.

The merger also created redundancies that added to costs, one creditor said.

Eventually, Fidelity Bond could not collect enough servicing fees to make up for its high costs.

In the fall of 1998 Fidelity Bond started to sell servicing rights along with nearly all the loans it sold.

The company needed cash, and bigger lenders paid it a premium for servicing. But that exacerbated the portfolio's attrition.

Summit Bank of Princeton, N.J., was Fidelity Bond's biggest creditor, with a $7.3 million exposure secured mainly by the servicing book, said James M. Matour, a partner at Middleman & Matour, the Philadelphia law firm representing Fidelity Bond in bankruptcy court.

The servicing portfolio was transferred to Summit over the last month. By then the portfolio had shrunk to $400 million, putting its market value at about $4 million.

Fidelity Bond still owes the bank about $3.3 million, said Mr. Matour, a turnaround specialist Fidelity Bond hired in January. "It remains to be seen how much they'll be able to recover," he said.

Republic First lost $1.6 million last year on its investment in Fidelity Bond, according to a filing the bank made with the Securities and Exchange Commission.

But PNC Bank, the company's warehouse lender, was "pretty well collateralized," Mr. Matour said.

Officials from Summit, Fidelity Bond, and Republic First did not return phone calls. A PNC official declined to comment, citing confidentiality agreements.

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