William R. Starkey's timing is looking pretty good.
Accubanc Mortgage, the Dallas mortgage bank he runs, sold off virtually all its servicing rights-$8.6 billion of them-on July 31. Since then, crises in emerging markets have prompted a rally in U.S. Treasury bonds, pushing long-term interest rates lower.
By midafternoon Friday the 10-year Treasury-the benchmark for mortgage rates-yielded 4.28%, down 121 basis points from the day the servicing sale closed.
"The smartest thing we ever did was to sell our servicing portfolio," said Mr. Starkey, Accubanc's chief executive officer, on Thursday. Many servicers who "thought they had a perfect hedge are losing money because of runoff," he said.
Though mortgage rates did not fall as much as 10-year Treasury yields, refinancing volume has increased. In the Mortgage Bankers Association's latest weekly survey, refinancings accounted for 62.8% of total applications, up from 45.3% in late July. That's good news for originators, but not for servicers, whose portfolios shrink when rates fall and borrowers refinance.
Many mortgage banks buy derivative instruments to offset such risks, but Mr. Starkey feels vindicated in his decision to make Accubanc a pure originator.
"The perfect hedge is not to be in servicing right now," Mr. Starkey said. And those who are, he said, will help him accomplish a goal: to make Accubanc one of the top 10 originators.
Accounting rules require servicers to book the servicing rights on loans they originate. Mortgage bankers have to write down the value of servicing on refinanced loans. As rates fall, servicers often buy loans to offset writedowns.
"The fuel that feeds the fire is production," Mr. Starkey said. "As the megaservicers experience runoff, we'll sell our production at a premium and allow them to protect their assets."
Accubanc's business has picked up. The company funded close to $1.1 billion last month, up from $1 billion in August. Its pipeline of loans not yet closed grew $200 million, to $2.4 billion, in September.
And what if rates rise and origination volume slackens? Mr. Starkey is confident that Accubanc's profit margins will remain the same regardless of where interest rates go.
For example, he will not let any of Accubanc's retail offices have net direct costs more than 25 basis points of production volume.
Even after the sale, the company retained its servicing platform, including 30 people and a servicing manager. It will continue to service between $1 billion and $3 billion at any given time between making the loans and selling them off.
Mr. Starkey has his eye on expanding Accubanc's operations in the Southeast. The company has offices in Charlotte, N.C., and Atlanta, but would like to expand into Florida.
"If we found a strong production company in the Southeast, we'd buy it," Mr. Starkey said.