Consolidation in mortgage servicing bas left an oversupply of servicing "platforms,)" i.e., facilities and people. That's creating a lot of idle computers, superfluous employees--and desks to clean out.
During the past 18 months, banks and other investors have been gobbling up mortgage servicing rights like they've going out of style. As any mortgage banker can tell you, servicing prices--in relative terms--have increased dramatically as the nation's new "mega" servicers fall over each other in the quest to fill their servicing operations with loans.
However, as the mortgage M&A fire storm continues apace, the market for the actual servicing plant, the "platform" that does all the paperwork on home mortgages, has fallen through the floor.
Many investment bankers who buy and sell mortgage companies for a living say that no longer are buyers willing to cough up any type of premium for the computers, software, leases and people that are the backbone of a mortgage servicing operation. (Together, these assets are referred to as the servicing platform.
"Today, it is the exception to the rule that a servicing platform will sell at a premium," says David Ertel, a servicing broker for Bayview Financial, Miami. One seasoned Wall Street veteran says that "it's to the point now where the buyer really doesn't care one way or the other about the servicing platform."
The Wall Streeter, who has worked on several large deals in recent years and requested that his name not be used, points to the recent offering of Prudential Home Mortgage Corp., Clayton, MO, an independent that services $75 billion in loans. (As USB went to press this month, PruHome had not yet sold.)
"Prudential Home," this analyst notes, "is getting attention from buyers because of the servicing rights it owns. No one that I've spoken to about PruHome cares at all about the platform. They want the servicing rights, and that's it."
Another example is Mortgage Service America, San Rafael, CA, a $3.5-billion servicer. The buyer, GMAC Mortgage of Elkins Park, MD, had no interest whatsoever in MSA'S servicing platform. Although both companies have yet to talk publicly about the sale, it is anticipated that the servicing platform will be dissolved--either by MSA or GMAC. "GMAC just simply doesn't need it," says one mortgage banker. So are all servicing platforms destined for the scrap heap once a mortgage banking firm changes hands?
Not necessarily. If the buyer is a new entrant to the mortgage business, it more than likely will keep the servicing operation. Trouble is, most buyers are already in the business and have their own, established platforms.
Ray Dinius, executive director of Countrywide Servicing Exchange, Pasadena, CA, believes the ultimate fate of each servicing platform rests in the hands of the buyer. "It's hard to make a blanket statement about all servicing platforms," says Dinius, adding a voice of sobriety to the debate.
To Wind Down or Not?
"Different companies have different strategies," he says. "A buyer may actually want two servicing platforms and therefore keep the new one that he's purchasing. However, in other cases, the firm may not be achieving the economies of scale that it wants with its existing platform, and it may very well wind down the new servicing plant."
Despite the differing views, one thing is clear: In the current round of M&A activity, buyers that covet a target company's servicing rights but don't want its servicing facility are now figuring out the "wind down" cost of the platform.
In today's market, a buyer often must agree to acquire the entire mortgage company just to get at the mortgage servicing rights. The buyer, especially if it's a large servicer such as Countrywide Funding, General Electric Capital Mortgage Corp., Chemical Banking Corp. or NationsBank Corp., already has at least one and possibly two servicing platforms.
The key for each is to achieve economies of scale. Typically, that means a large servicer will centralize as much servicing as it can into one or two platforms. Any "extra" servicing platforms that are purchased during the course of an M&A binge will be liquidated.
In many cases, however, the seller wants to avoid the hassle of shutting down the platform and will try hard to sell the operation in one fell swoop. "Today, buying a platform is really a liability," explains Art Johnson, a servicing broker for Cohane Rafferty Securities Inc., Harrison, NY.
"The buyer that gets the platform but who doesn't really want it must deal with a number of headaches," says Johnson. "There's leases to cancel, employees to lay off or transfer and equipment to get rid of, if you're a buyer, your goal is to purchase the fee side of the business. You want to limit your expenses as much as possible."
However, shutting down a servicing operation is rarely easy. With layoffs, severance packages are involved--and, sometimes, lawsuits from disgruntled employees. "When you have 50 or people who have to be let go, there is always a chance that some type of lawsuit will be involved," says Johnson.
It seems logical to most mortgage bankers that over time, the current M&A binge will result in fewer servicing facilities. It is always cheaper to do all of the servicing in one or two facilities than to spread over several locations. Also, the better the computer technology, the fewer employees will be needed to run a servicing operation, or so the theory goes.
Case in point is First Tennessee Bank (FTB), Memphis, an aggressive buyer of mortgage firms in recent years. During a 12-month stretch, First Tennessee purchased Carl I. Brown & Co., Kansas City, MO; Maryland National Mortgage Corp., Baltimore; and Sunbelt National Mortgage Corp., Dallas. Each had its own servicing platform.
At first, FTB said it would keep all of the servicing platforms in place. But when the origination market nose-dived in mid-1994, the bank decided that it could cut costs by consolidating all three servicing platforms--plus the bank's platform in Memphis--into Sunbelt's Dallas facility. The consolidation will be completed this fall. If FTB buys another mortgage company to increase its servicing portfolio, it's unlikely it will take the platform.
Then again, there's Norwest Mortgage Corp., Des Moines. Like FTB, Norwest has been buying up mortgage companies left and right. At last count, Norwest owned about six servicing platforms. Company officials so far have declined to talk about what it might do with all those facilities.
Some observers think it's inevitable that Norwest might combine at least some of them. Or, they say, Norwest may transform each servicing facility into a "specialty" site, meaning that one location would handle billing, another escrow, another taxes and customer inquiries--and so on.
"The Norwest situation just goes to show that you can't generalize about all this," says one mortgage servicing technology executive. "When it comes to servicing platforms, what applies to one does not apply to all."