DALLAS -- Lomas Financial Corp. is back in the saddle, or so it hopes.
The Dallas-based concern, once the nation's preminent mortgage bank, rode the Texas real estate bust of the 1980s right into bankruptcy court. But now it's making another run for glory, this time with an almost single minded focus on the servicing side of the business.
Unfortunately, it has a new economic foe: the refinancing boom.
As homeowners pay off existing loans to take advantage of the lowest interest rates in a generation, Lomas and other big servicers are struggling to keep their income intact.
A |Sell' Recommendation
Though Lomas services some $32 billion of mortgages -- ranking among the top 15 in the country -- the company may only break even over the next two years, says Sy Jacobs, an analyst with Alex. Brown & Sons. Mr. Jacobs, one of the most respected mortgage banking analysts, recently initiated coverage of the company with a "sell" recommendation.
None of which seems to shake the confidence of Jess Hay, 62, Lomas' chairman since 1965. He remains an ardent believer in the strategy Lomas has been following since it emerged from Chapter 11 in December 1991.
|A Reasonably Good Beginning'
"We believe that we have had a reasonably good beginning." he said in an interview in his Dallas office.
The office has a distinctly prebankruptcy feel. An oriental rug with an intricate design graces the floor; an enormous Tiffany & Co. grandfather clock sits in the reception area.
Whether Mr. Hay can restore Lomas' lost luster is still an open question in mortgage banking circles. But the strategy has clear appeal: gather larger quantities of servicing without the expenses of retail loan offices.
The idea is to achieve handsome economies of scale in servicing and further leverage the company's computer power by helping other servicers.
Certainly, Lomas hasn't done poorly so far, given the circumstances. The company, which earned $15.4 million in the fiscal year ended June 30, has managed to increase the size of its servicing portfolio despite rapid runoff of existing loans.
In the last fiscal year, the portfolio grew by 11.6%, even though existing loans left at annualized rate of 31%.
"We have demonstrated, somewhat to our own surprise, that we have been able to thrive in this interest-rate environment," said Mr. Hay.
|Gathering System' a Key
Lomas has been able to keep pace with the breakneck speed of runoff through its "gathering system," a multipronged effort that includes agreements to purchase new servicing rights as other lenders originate them. The company makes purchases of the rights in bulk.
This year, the company expects to take in the rights to service about $16 billion of loans, Mr. Hay said.
Known as recently as the late 1980s for its prowess in retail loan offices. Lomas currently has no retail offices. But it is starting to originate loans through such nontraditional channels as telemarketing and affinity groups.
Stepping Back from Bulk Deals
"We're sort of tiptoeing back into retail, but in an entirely different way" said Mr. Hay. Lomas also has built up its Lomega unit. which establishes correspondent relationships with mortgage originators. The company expects Lomega to be a major producer of servicing rights in the coming year.
The company, however, is stepping back somewhat from bulk purchases, which totaled about $3 billion in the most recent fiscal year.
The value of bulk purchases, which by their nature lag behind failing rates, has taken a pounding as rates dropped. Lomas, however, maintains that it will be far less dependent on bulk purchases in the future. "We expect that to come down to about $900 million" in the current fiscal year, said Mr. Hay.
The weighted average coupon of Lomas' servicing portfolio stood on June 30 at a hefty 8.80%, a level that might suggest continued susceptibility to runoff. Mr. Hay responds by pointing out that more than 21% of the portfolio consists of mortgages with coupons greater than 10%. "You have got to think that those people have not refinanced for some fundamental reason," he says.
Though Lomas has been able to feed its mortgage servicing furnace in trying times, the company's method of amortizing its servicing has recently become a subject of some controversy.
One of Mr. Jacobs' main contentions is that Lomas is underamortizing its purchased mortgage servicing rights.
To support his argument, the Alex. Brown analyst points to the fact that in fiscal year 1993 Lomas experienced a 31 % runoff rate but amortized only 15% of the value of its portfolio.
It is Mr. Jacobs' belief that such ratios have the effect of creating a hidden defecit, one that may eventually be recognized through a writedown similar to that taken this year by Fleet Mortgage.
Jess Hay and Lomas officials disagree vehemently, "That was sort of a red herring," said Hay. Lomas believes that, in fact, it has been amortizing its servicing correctly.
"We broke it down to 24 tranches . . . and there was no impairment in any of the them," said Mr. Hay.
Lomas officials contend the discrepancy between the company's runoff rate and its rate of amortization is caused in part by loans with lower servicing fees-especially jumbo mortgages-running off at a greater rate than the rest of the portfolio.
Nonconforming loans, which comprise 15% of Lomas' servicing portfolio. ran off last year at 170% of the norm, according to the company.
It is uncertain which side investors are buying, as Lomas shares fell sharply after the recent Alex. Brown & Co. report but have regained most of the lost ground in recent trading.
The report also raised issues about Lomas' other main business thrust, its information systems services unit [see accompanying article].
Lomas certainly feels that its long-term outlook is favorable, especially if the refinancing boom abates. "I would guess that we are as well positioned as any one in, the industry to be a net beneficiary of the end of the refinancing wave," said Mr. Hay.
Lomas believes that, as a company without a retail work force, it would be better able to cope with industry contraction than most of its brethren.
The company would also benefit from a rise in rates and the resultant slow down in servicing runoff.
Despite the hardships low rates may have imposed on his company, Jess Hay is able to focus on the benefits that low rates have had for the economy as a whole.
"We are, as a company and an industry, about the task of refunding America."
Lomas Is Betting Heavily on Technology
A key to the future of Lomas Financial Corp. may turn out to be Lomas Information Services, the unit that provides information systems services to its parent and outside clients.
The idea: harness Lomas' investment in technology, and sell the services to outside clients.
Lomas Information Services recently completed conversion to the Excelis MLS system. As Lomas carries $62 million of software as a capitalized asset, the unit is obviously a big investment for the company.
With its revenues falling attendant to the switch to Excelis, the unit lost money last year. The system currently services about 1.2 million loans. It would need to carry 3 million to break even, according to Lomas officials.
Sears Contract at Issue
"That will probably continue as a problem, although hopefully a declining one, for another couple of years. We now expect LIS to be a contributor by the end of our FY1995," said Mr. Hay, who added that the company has letters of intent for significant new customers.
At issue, however, is the fate of a five-year contract recently signed with Sears Mortgage. The contract represents about 5% of all loans on the system and the issue, first raised by Alex. Brown's Sy Jacobs in his report, is whether PNC Bank Corp., which recently purchased Sears, will pull its loans back to its own system.
|Have Received Excellent Services'
A Sears, Mortgage spokesperson responded. "We have received excellent services from Lomas and have no immediate plans to make a change."
Lomas officials believe that PNC is likely to honor the agreement, signed in April, because the PNC system would require an overhaul to accommodate the Sears loans.
Also in the equation are unspecified penalties which Sears would incur if it dropped the Lomas unit. "We are encouraged to believe that Sears is a happy customer. We do not believe that the system PNC currently has would be able to absorb Sears without big enhancements," said Lomas chairman Jess Hay, who hopes to win PNC as an additional customer.
A section of Lomas which has shown strong signs recently is the Intellifile document imaging and retrieval division, which has signed a contract with the Los Angeles County court system to make court filings available to lawyers in Los Angeles County.