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NetBank Sells Servicing But Will Still Manage Portfolio

NetBank here reached a deal to sell servicing rights on mortgages totaling $8.5 billion at a loss, with most of the asset going to IXIS Real Estate Capital. But IXIS, an investor in servicing rights, will hire NetBank to subservice the portfolio, so operationally the loans won't be going anywhere.

In an announcement, NetBank said that the mortgage servicing rights were sold for $119 million in two separate transactions and involved 70% of NetBank's mortgage portfolio. NetBank is retaining ownership of MSRs on approximately $3.5 billion of mortgage loans.

NetBank sold servicing rights on $8.2 billion of Fannie Mae and Freddie Mac loans to IXIS Real Estate Capital. A second unnamed buyer acquired serivicing rights on $230 million of Ginnie Mae loans. Both transactions closed on Sept. 29.

NetBank said the sale of MSRs and related hedges will result in a one-time expense of $0.61 per share. The sale results in an after-tax loss of $19.3 million since the sales price was below the carrying value of the servicing rights.

At the same time, NetBank liquidated the Ginnie Mae mortgage-backed securities that it held as an on-balance-sheet hedge for the MSRs. This resulted in an after-tax loss of $8.7 million, bringing the total loss on the two transactions to $28.1 million. NetBank said the transactions have "limited impact" on tangible book value.

In an unusual twist to the servicing sale, NetBank will continue to service loans as a subservicer for IXIS. The company said it had planned to maintain a servicing operation to handle the MSRs it is retaining as well as to service its own mortgage production on an interim basis before loans are sold into the secondary market.

"The cost of selling these MSRs exceeded our initial expectations, but we believe the entire transaction and the timing of it serves the long-term interest of our company and shareholders," said Steven Herbert, chief executive officer. "The transaction immediately improves the operating profile of the company as well as our bottom line. By reducing the size of our MSR portfolio, we eliminate significant earnings volatility. We will no longer have the same level of exposure to impairment and hedge-related losses. The bank's net interest margin should see incremental lift following the liquidation of on-balance-sheet hedges. We also felt the intrinsic value of the subservicing contract provided a meaningful offset to the lower price," Mr. Herbert said in a news release. NetBank had not released third-quarter results when MSN went to press, but the company said it expected to report a loss.

Mr. Herbert recently replaced Douglas Freeman, who resigned as chairman and CEO of NetBank effective Oct. 5. The resignation came just as NetBank was finalizing the MSR sale, using Countrywide Servicing Exchange, Pasadena, Calif., as its broker.

Initially, Phoenix Capital, Denver, had represented NetBank in the sale, but then the company changed advisers. A spokesman for NetBank earlier told Mortgage Servicing News, "We wanted a bigger firm to represent us."

In the resignation announcement, Mr. Freeman said a transition at this point in the company's life cycle is in the best interest of shareholders.

"Economic and market conditions have weighed heavily on the company's performance and impeded our ability to fully execute a number of the strategies we intended. Since the beginning of the year, we have begun to scale back a number of ancillary businesses to direct our more limited resources to the businesses that drive the best return for our shareholders," Mr. Freeman said. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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