What's On Ge's Mind?
Home sales are soaring. The economy is hot. So why is General Electric Capital Services Inc. rumored to be trying to get rid of its huge, easy-money mortgage-servicing business? Does GE Capital know something that no one else does? "If there's some reason for [GE Chairman John F. Welch] to sell, you've got to ask yourself what's going on there," says Citicorp Chairman John S. Reed.
What's likely going on is one of those fortuitous situations in which both the seller and the buyer could come out ahead. GE declined comment.
AWKWARD POSITION. From GE Capital's perspective, the mortgage-servicing division isn't large enough. Even though it has a $99 billion portfolio, GE ranks only No.6. Welch usually wants to be the No.1 or No.2 player in an industry. To get that kind of clout, GE could acquire. That, however, would put it in an awkward position. Most big mortgage servicers, mainly banks such as Citibank and Chase Manhattan Corp., like the synergy of both servicing and originating loans. But GE is inhibited from expanding its origination business because that could cannibalize its highly lucrative business selling mortgage insurance, mostly to banks. It is the No.2 player; earnings rose 25% in 1997, according to Prudential Securities Inc. analyst Nicholas P. Heymann.
So it makes sense for GE to sell. GE is said to want $1.25 billion to $1.5 billion. But will it find a buyer? Over the years, margins in mortgage servicing have dropped as competition increased and interest rates declined. "Everyone's getting into it," says Kim Betancourt, director of structured finance ratings at Standard and Poor's Corp. But "it's a very competitive market--spreads are tight."
Another negative is an almost unprecedented wave of mortgage refinancings as a result of low interest rates that make 30-year mortgages cheaper than shorter adjustable-rate mortgages. In an average year, 15% to 20% of mortgage applications a week are requests for refinancing. In the first two weeks of 1998, by contrast, 68% were. Levels near that are expected to continue as rates are low, according to the Mortgage Bankers Assn., a Washington trade group. When homeowners refinance, servicers suddenly lose a lot of income they had counted on for years to come. "This is not a good time to be selling," says Richard M. Kovacevich, CEO of Norwest Corp.
But for servicers that originate a lot of mortgages, adding more servicing would enhance economies of scale and raise margins. So while GE Capital has reduced its portfolio by 5% since March, 1997, Norwest Mortgage, the nation's top mortgage servicer since 1995, has amassed a $205.8 billion loan portfolio, 12% larger than in March.
Chase, the No. 2 player, which is actively turning around its mortgage division, saw its portfolio increase 5%, to $169 billion. And midrange players have been consolidating, too. Buying all or part of GE's unit would give any of them instant credibility.
Still, "valuations have hit the moon," says Andrew D. Stone, managing director in Credit Suisse First Boston Corp.'s principle transactions group. "If you don't have a strategic reason to stay in the business, [such as] taking advantage of origination, why not sell to someone who would love to pay a huge premium?"
GE will have a harder sell as long as the refinancing boom continues, which David A. Lereah, chief economist of the Mortgage Bankers Assn., estimates will be at least through the second quarter of this year. But analysts say a deal is likely to come sooner than later. And that could turn out to be a win-win proposition for both sides.
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