A strong market for servicing rights on mortgage loans has developed as home lenders react to higher interest rates.

American Banker has identified on the selling block servicing portfolios covering about $20 billion of mortgage loans, including packages from Colonial Bancgroup of Montgomery, Ala.; FT Mortgage of Dallas; and California Mortgage Service of Santa Ana. Brokers said many smaller transactions also are in the works.

Rising interest rates in the last year have made homeowners less apt to pay off their mortgages early, which means that servicers can count on collecting fees longer. Companies are limited in how much they can write up their servicing assets, so selling is often the only way they can realize the gain in value. Small and midsize companies hope to take profits on servicing assets to make up for losses on the production side; bigger firms, hoping to maintain portfolio growth even as loan production declines, are eager buyers.

"Sellers are making business decisions to sell, because buyers are very aggressive. We've got a good market. There's a good balance between buyers and sellers," said Herman Churchwell, chairman and chief executive of Hamilton Carter Smith & Co., a servicing brokerage in Beverly Hills, Calif.

Colonial Bancgroup again has put Colonial Mortgage Co. up for sale, according to people familiar with the situation. This time it has tapped Countrywide Servicing Exchange as its adviser. Colonial Mortgage was on the block last year, but the parent sold only its wholesale production offices.

It is believed that Colonial was unable to find an acceptable price last year. But the rise in rates has pushed up the value of servicing, so Colonial is likely to see stronger bids this time. On Sept. 30, Colonial valued its servicing rights - the mortgage unit's chief asset - at $270 million, according to the most recent quarterly filing with the Securities and Exchange Commission.

Colonial did not return calls; a Countrywide official would not comment.

The assignment represents another coup for the Countrywide Credit Industries unit, which last year advised Pitney Bowes Inc. on the sale of its mortgage subsidiary. Colonial services $16.26 billion of loans, according to National Mortgage News, a sister publication of American Banker.

Meanwhile, FT Mortgage Companies, a unit of First Tennessee National Corp., is auctioning a $3.5 billion bulk servicing package. James B. Witherow, chief executive officer of FT Mortgage, said the servicing sale is part of the company's overall strategy to balance production and servicing as the business shifts: "We've always done it to ensure our flow is smooth and to minimize volatility in the business."

BayView Financial Trading Group is handling the sale, sources said. Officials at the Miami firm declined to comment.

California Mortgage Service is said to be gauging market interest in its $1.7 billion servicing portfolio, though it has not made a final decision on whether to sell. An official at the Santa Ana, Calif. company said he was "not aware" of any auction, but rival brokers said Cohane Rafferty Securities of White Plains, N.Y., has circulated an offering memorandum to a select group of potential buyers. A Cohane official declined comment.

Elsewhere, Principal Residential Mortgage, a unit of Principal Financial Group, last week signed a "flow" deal with First Nationwide Mortgage. Principal agreed to sell servicing rights on $100 million to $200 million of new loans per month over a 12-month period to the California Federal Bank unit. Phoenix Capital of Denver brokered the sale.

First Nationwide also recently purchased an $878 million bulk package of servicing rights from Citizens Bank in Providence, R.I., market sources said. Cohane Rafferty ran the auction, the sources said. First Nationwide and Cohane would not comment; a Citizens spokeswoman offered no comment by press time.

Mr. Churchwell said his firm has four portfolios for sale - the largest at $750 million and the smallest at $42 million - and that several firms are planning sales for the second quarter.

In the opaque market for servicing rights, terms are rarely disclosed and estimating prices is tricky. Brokers said that generally, conventional servicing is worth 1.5% to 1.95% of face value at present.

That would put the value of FT Mortgage's deal somewhere between $52.5 million and $68 million and that of California Mortgage Services' portfolio in the range of $26 million to $33 million.

Chuck Klein, managing director of Charbonneau-Klein Inc. in Houston, said that big players, such as GMAC, Fleet, Countrywide and Norwest Mortgage will be aggressive in bidding for servicing.

"Seasoned servicing will draw a lot of attention, provided the coupons are less than 8.5%," he said. "The sentiment is that rates are going up, the economy has steam, so buyers will bid aggressively."

Charbonneau-Klein is handling three deals totaling about $491 million.

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