Mortgage banking falls to slow economy

Corporate Growth Report Weekly, Oct 31, 1994

Our slowed-down economy and the dramatic halt in refinancing has forced a wave of consolidaitions and mergers in mortgage banking. Last February marked the beginning of serious consolidations.

The two largest acquisitions have been of Margaretten & Co., Perth Amboy, NJ, by Chemical Banking Co. and Chase Manhattan's purchase of La Jolla, CA-based American Residential Holdings Corp. (the fourth and fifth-largest publicly traded mortgage banks, ranked by value of loans serviced)

With the record-high levels of refinancing originations from 1992-93, mortgage bankers got used to rolling in money, and they thought it would never end.

Well, it ended For the week of Aug. 5, 1994, the Mortgage Banking Association index for refinancing was 127. A year earlier, the figure was 1257. The downturn was caused by rising interest rates, which made refinancing less attractive. At the same time, a slow-down in the economic recovery dried up an expected boom in new loan originations.

To cope, mortgage lenders are downsizing and selling their loan servicing portfolios as they struggle to survive. Many are becoming takeover targets for other financial institutions.

A lot of the action is going to banks, which have the money to bail out a distressed mortgage lender. In fact, banks are involved in 25 of the 31 current mortgage banking transactions. Yet, some banks are going counter to the trend, and are selling their own mortgage-lending operations. US Bancorp is selling to Mellon, while Michigan National Corp is selling to Norwest Corp. The motive is to shed periperal operations.

Potential buyers that are still circulating include NationsBank Corp. of Charlotte, NC which has agreed to buy a large chunk of servicing from Express America. Citicorp is rumored to be the leading bidder for Source One; and Bank of Boston, is reportedly "close" to signing Arbor. The attraction is the fee-based income generated, and the potential for cross-selling services to a greater customer base.

Most leaders in the banking industry classify these acquisitions as healthy. However, some like Bank Analyst, James Marks of Sutro & Co. believe that the mortgage banks are commanding prices well in excess of what they're worth

Marks may have a point. If acquirors overbid their targets they may find that they have created more problems than fee-based income or cross selling can solve.

Clearly, competition among potential acquirors is driving the prices higher. The risk is that banks may get stuck with a lot of expensive. messy junk that will imperil their own health survival.

We don't want to keep repeating the refrain, but time will tell.