Mortgage banking is looking as if it has multiple-personality disorder.
Some lenders have been shopping ambitiously for servicing rights while others are eager to dump their portfolios. And some lenders have chosen retail originations as the high road to profits, while others are convinced the true path is wholesale.
But Source One Mortgage Services Corp., emerging from an identity crisis of its own, is presenting a more integrated face to the world under the guidance of chairman Terry L. Baxter. Together with James Conrad, Source One's chief executive, Mr. Baxter has forged a new strategy.
Mr. Conrad, who is in charge of day-to-day operations, says it is futile to look for a panacea for the industry's low profitability. "There is no cookie-cutter approach out there to mortgage banking," he asserts.
For Source One, the plan is to capitalize on the outsourcing trend on the servicing side and to expand and streamline operations on the originations side.
Mr. Baxter, who came over last June from Source One's parent, Fund American Enterprises, says the company's main focus is reducing its exposure to interest rate risk, which goes with a large servicing portfolio.
To that end, the company announced the sale of $19.3 billion of its servicing portfolio to Chase Manhattan Mortgage Corp. last December. But the move is not meant as a retreat from servicing. Instead, Source One will subservice the loans for Chase for a minimum of one year. And it is actively pursuing other subservicing clients.
Since Chase is busy integrating servicing it acquired in its merger with Chemical Banking Corp., it will not process monthly mortgage payments on the Source One servicing. But it will own the servicing rights.
This means Source One will not have to bear the risk associated with interest rate swings. The company will earn fees, a steadier source of profit, for servicing the loans.
Industry observers say Source One's decision to subservice demonstrates a stronger commitment to the mortgage business than has been seen from the company in recent years.
Robert N. Husted, principal of MIAC Risk Management Services, New York, says Source One should move into the top ranks of the subservicing market since it is known as a low-cost servicer.
For Source One the move into subservicing is a way to adapt to a new servicing environment. It was the second-largest servicer as recently as 1992. But many of the industry's erstwhile leaders have been displaced by the creation of mortgage giants through bank megamergers. And new accounting standards for servicing rights have also changed the nature of the competition.
Many small and midsize mortgage banks have had to reevaluate whether they want to stay in the business. Fund American held an auction for Source One in 1994 but got no attractive offer once interest rates surged and the refinancing market tanked.
And just last year, Mellon Bank Corp.'s mortgage unit was prepared to buy Source One but bowed out after months of fruitless negotiations.
The Chase deal will leapfrog Source One to the upper echelon of mortgage subservicers even though the company has only one other subservicing client, CDC Servicing Inc. Source One handles about $4 billion of loans for CDC, a subsidiary of the French financial institution Caisse de Depots et Consignations.
Now Source One has set its sights on the established players in the industry. A history of the company shows that it is well prepared for a shootout. Mr. Baxter jokingly notes that the company's first chairman was Stanley Earp, a direct descendant of Wyatt Earp, the legendary Wild West lawman.
Source One's new strategy may not resemble the celebrated gunfight at the O.K. Corral. Still, the company has demonstrated it will fight for market share.
Robert Densmore, executive vice president at Source One, says subservicing specialist Dovenmuehle Mortgage Inc. was able to retain several contracts only after repricing them in order to compete with Source One's bids.
But industry observers say the main issue in subservicing today isn't price but a technological concern. Mr. Husted of MIAC Risk Management says that many companies looking for a subservicing partner want what is known as private-label servicing.
With such servicing, when a customer calls, the operator answers the phone as if it were at the institution that holds the servicing rights.
This may sound like a simple problem to solve, but Mr. Husted says it requires an expensive phone system. When a customer calls the subservicer, the operator must be able to tell which mortgage servicer the customer wants.
"Companies jockeying to be the next Dovenmuehle need to weigh this investment in technology," Mr. Husted says.
Mr. Densmore says that bank-owned mortgage companies, especially, want private-label servicing. He added that Source One is willing to provide this.
All the company's servicing functions are performed in its Farmington Hills, Mich., headquarters. Much of the servicing technology Source One uses has been developed in-house.
"Every customer has unique requirements," Mr. Conrad says. "We can adapt and respond quickly since we don't depend on a third party."
Thomas Jacob, Chase Manhattan Mortgage's chairman and chief executive officer, said he was impressed with Source One's facilities and its cost structure. Still, he points out that the contract with Source One lasts for a minimum of one year and a maximum of three.
Mr. Densmore says Chase is satisfied with Source One's subservicing arrangement and that the decision to renew probably will depend on how much more servicing Chase plans to acquire in the next three years.
The servicing sale to Chase drastically reduces the overall impact that Source One will have on the financial statements of Fund American. Mr. Baxter says that, once the transaction closes, Source One will account for only 10% of Fund American's net worth, compared with almost 50% just a few years only ago.
But Source One has not ruled out making bulk purchases of servicing. The key, Mr. Baxter says, is finding loans that are less susceptible to prepayment. He gave the example of the company's purchase last October of $2.8 billion of servicing from Harbourton Mortgage Co.
All are government-backed loans that Mr. Conrad says do not pay off as quickly as other types. Thus, the portfolio is less susceptible to declines in value when interest rates rise.
Source One's servicing portfolio when the Chase transaction closes will be between $10 billion and $12 billion. Mr. Conrad says he is hopeful that the total could double this year as a result of planned acquisitions and loans that Source One itself originates.
On the production side, Mr. Conrad says, Source One plans about 20% growth in its correspondent business and expects to add about 30 retail branches this year. The company is also continuing a search for a national production head.
The hallmark of Source One's new branches will be increased use of technology to speed up originations. Mr. Conrad says smaller branches were rapidly becoming a more profitable vehicle for originations. With more computers, retail branches can be run more efficiently and are less labor- intensive.
Mr. Conrad says he thinks the industry is looking at increasing its retail capabilities. "You can control your own costs better than you can control competitive pricing in the wholesale community," he says.
But perhaps the key to Source One's growth is that Fund American is not intent on micromanaging mortgage operations from its Norwich, Vt., headquarters.
Mr. Baxter, who served in the administrations of Presidents Reagan and Bush before joining Fund American in 1993, is perfectly content to let Mr. Conrad, who has been with Source One for 13 years, and Mr. Densmore, a 21- year veteran of the company, run the shop.
"We want to be an intelligent owner, not managers," Mr. Baxter says.