Investor Leon Black's group paid $192 million for Weyerhaeuser Mortgage Co., a substantial premium over the value of its $4 billion servicing portfolio.
Weyerhaeuser disclosed the price last week upon the conclusion of the sale. Observers said Mr. Black paid a premium because he was eager to get into the growing business of lending to people with lower credit ratings.
Speculation about the price has swirled around the mortgage industry since February, when Weyerhaeuser Corp., the Federal Way, Wash., paper and forest products giant, said it was selling its mortgage banking unit to WMC Acquisition Co., a joint venture of Apollo Advisors and Spring Mountain Escrow.
Apollo is an investment partnership run by Mr. Black, a former head of mergers and acquisitions at the now extinct junk bond firm Drexel Burnham Lambert.
Typically, much of a mortgage bank's profits come from servicing, so when these companies are sold, the servicing portfolio is the main determinant of the company's value. At the time of the sale, brokers and investment bankers said Weyerhaeuser's servicing was worth no more than $80 million.
But other observers said the price reflects the growth potential of the company's subprime unit, now known as WMC Equity Services. The subprime unit originated $500 million of loans to people with poor credit histories last year. Overall, WMC originated about $3.5 billion in mortgages.
One source said WMC is looking to sell off the servicing it has in order to focus predominantly on originating loans to so-called B and C customers.
In a written statement, chief executive Scott A. McAfee, chief executive of Spring Mountain and WMC, said the company plans to remain a "formidable competitor" in the subprime business. Mr. McAfee became chief executive of WMC Mortgage when the deal closed.
In addition, he said WMC will now securitize loans it originates, something the company had not been doing before. No mention of the company's servicing portfolio was made in the statement.
Last month, H&R Block anted up $190 million for Option One, Fleet Financial Group's subprime unit. Option One only services about $1.9 billion but originated $1 billion in B and C loans last year.
Also last month, Resource Bancshares Mortgage Group agreed to issue about $320 million in stock to merge with Walsh Holding Co., a subprime lender that had no servicing portfolio but originated $660 million of mortgages in 1996.
But one investment banker said despite these premiums for B-and-C originators, the price for WMC was "hard to justify." The investment banker represented another firm that was interested in bidding for WMC and said the price it felt was fair for WMC wasn't anywhere close to $192 million.