Are mortgage banking companies worth more in the private market than they are as public companies?
Most observers believe they are, and they say that is a reason for the strong interest in takeovers of mortgage companies by thrifts and banks. But how is the private-market valuation computed?
One company that has a rigorous valuation model is Mabon Securities Corp., New York. It starts with shareholders' equity and subtracts capitalized and purchased servicing rights. It then adds back the value of each company's servicing portfolio based on the quality of the portfolio. And finally, it adds a value for each company's loan production.
A recent report by Mabon analysts Steven F. Mermelstein and Paul J. Isaac gave estimated values for 15 mortgage banking companies. An enterprising investor could use the list to single out potential takeover targets.
American Residential, for example, shows an implied private valuation f $25 a sahre, against a June 1 market price of $18.375. North American Mortgage is valued atat $32, against $25 in the market; Express America, $20 against $10.50; and Plaza Home Mortgage, $15, against $8.125.
Countrywide Credit, on the other hand, carries a private value of $16 a share, against a market price of $16.625, and on this basis would not appear to be an attractive takeover candidate.
But private market value isn't the whole story. The Mabon analysts also calculate th growth rate for each company's "economic equity," which is essentially its private-market value minus the value of loan production.
Am Res, North American, Express America, and Plaza, however, showed sharp slowdowns in their growth rates in the most recent reporting period, while Countrywide held steady.
The analysts said takeover speculation appeared to be the prime driver of prices right now, but as takeover activity slows, "the companies could revert to trading based more on their operating fundamentals than on what they would fetch in an acquisition."
"The correlation between price to 'economic equity' and lst-quarter growth rate, as well as price to 'economic equity' an servicing portfolio weighted average coupon have fallen ...from last writing to current writing," the report says, attributing the "decoupling" to takeover speculation.
A Matter of Judgment
The analysts apply a wide range of valuations of servicing, giving Countrywide the industry's highest at 160 basis points. At the other extreme are Lomas Financial Corp. and First Mortgage Corp. of Diamond Bar, Calif., at 110 basis points.
"These valuations are primarily subjective," said Mr. Mermelstein. "We look at average weighted coupon, average loan size,prepayment history, average weighted servicing fee, that sort of thing. But the judgment is qualitative."