A NationsBank Corp. subsidiary yesterday agreed to buy $10 billion of mortgages for its servicing portfolio, a deal that will boost the company's servicing business by 25 percent.
NationsBanc Mortgage Corp. said it signed a definitive agreement to buy a portfolio of mortgage-servicing rights from Source One Mortgage Services Corp., of Farmington Hills, Mich. Source One's parent is Fund American Corp., of Norwich, Vt.
"This is an excellent opportunity to increase our size in the mortgage- servicing business," Andrew D. Woodward, president of NationsBanc Mortgage, said.
The rights entitle NationsBanc to a steady source of fees for collecting mortgage payments from homeowners, doing other paperwork and forwarding the payments to the lenders. As servicer, NationsBanc is not liable for defaults by borrowers.
The sale would bring NationsBanc's servicing portfolio to $50 billion, the 11th biggest pool in the nation, according to Inside Mortgage Finance, a Bethesda mortgage industry newsletter. Currently NationsBanc Mortgage is the 15th biggest servicer.
NationsBanc, which maintains executive offices in Charlotte, N.C., and Dallas, did not disclose terms of the transaction. The deal is due to be completed by the end of March.
The company said it will be able to handle the increased load without adding employees at its two major servicing centers: Kentucky, where 500 people are employed; and Arizona, which has 130 people.
"Right now we're very attracted to servicing portfolios because they're a recurring income stream," said NationsBanc spokeswoman Mary Alice Rogers.
Source One said it will be left with $30 billion of mortgages to service. "The price of mortgage servicing as a commodity in the market is very attractive right now, and we decided to take advantage of that," said Tim Shepherd, director of marketing and communications for Source One.
The Source One mortgages, about 115,000 in all, are for homes in California, Texas, Florida and Washington state. They have an average weighted interest rate of 7.72 percent.
The lenders include the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Government National Mortgage Association (Ginnie Mae), the large government-created mortgage companies.
Because the loans are below today's interest rates, there's little risk of prepayment by homeowners looking to refinance, industry members said. Large-scale prepayments, such as occurred several years ago when interest rates fell sharply, would erode the value of the servicing rights.
"I think the general feeling is it's a good time to acquire servicing rights if you can get below-market rates, as they have here," said John Lewis, managing editor of Inside Mortgage Finance.
For NationsBanc, the higher volume of loans will allow the company to generate more revenue without much more cost, Mr. Lewis said.