Colonial Bancgroup of Montgomery, Ala., has put its mortgage unit on the block, servicing brokers and investment bankers say.

Meanwhile, First American Corp. of Nashville is selling its $5 billion portfolio of servicing rights on loans it services for investors. The banking company will continue to service the loans it holds on its own books.

The two offerings are expected to fetch high prices because mortgage servicing rights have gained in value recently, thanks to rising interest rates, which reduce prepayments.

One servicing broker estimated that Colonial Mortgage Co. could sell for $227 million to $275 million, or 1.425% to 1.7325% of the face value of its $15.9 billion servicing portfolio.

Even the low end of that range is higher than the $221.52 million value the banking company gives its servicing asset in its latest 10Q filing with the Securities and Exchange Commission.

Goldman Sachs is said to be shopping the Colonial unit around. United Financial Inc., a Denver boutique, will broker the First American portfolio.

A Colonial official declined to comment, and Goldman did not return phone calls by press time. A United Financial official confirmed that his firm was handling the First American sale, but he gave few other details.

Last year's falling interest rates prompted millions of homeowners to refinance their mortgages. For companies like Colonial that had no financial hedges in place, the results were painful. Colonial took a $30 million writedown in the third quarter.

Last December it said it would stop relying solely on originations to make up for prepayments and start using financial instruments such as Treasury futures, which increase in value when rates fall. Colonial even hired United Capital Markets, an affiliate of United Financial, to advise it on its new hedge program.

At the time, Flake Oakley, Colonial's chief financial officer, told American Banker that his company might sell some of its servicing portfolio.

Colonial is known as a highly efficient servicer, largely because of the low labor costs in Montgomery. This year's rise in rates has allowed it to write its portfolio back up by $38 million.

But the company has apparently decided it no longer wants the headache of a risky, volatile business that requires tremendous financial sophistication.

First American last year purchased Deposit Guaranty Corp. of Jackson, Miss.

The package now being auctioned includes servicing rights on loans that were serviced by both institutions. Bids are due Thursday.

First American announced in June that it would merge with Amsouth Bancorp of Birmingham, Ala., which sold most of its servicing in 1995. The merger is expected to close in the fourth quarter.

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