Merrill Buys 11th Largest B&C Servicer

In a deal that will make it the second largest Wall Street servicer of subprime loans, Merrill Lynch & Co., has agreed to buy National City Home Loans Services and two affiliates for a $1.3 billion.

Based in Pittsburgh, NCHLS services $44.2 billion in residential mortgages. The largest Wall Street servicer is HSBC Mortgage Services, Charlotte, N.C., with $50.5 billion.

Two other Wall Street firms, believed to be Goldman Sachs and Deutsche Bank, had expressed intense interest in the subprime operations of National City Corp., investment banking sources told Mortgage Servicing News.

Besides NCHLS, Merrill is acquiring subprime funder First Franklin Financial Corp., San Jose, Calif., and NationsPoint, Lake Forest, Calif., a direct-to-consumer lender.

Merrill already has a presence in mortgage banking through a Minneapolis conduit and a Florida affiliate that caters to its wealthy clients. It also owns a specialty servicer, Wilshire Credit Corp., Beaverton, Ore.

The FFFC and NCHLS acquisitions, though, move it to the head of the class in subprime funding and servicing. (Most of FFFC's production is sourced through loan brokers via the wholesale channel.)

Over the past few years several traditional Wall Street firms have increased their presence in mortgage banking by forming conduits, investing in existing lenders, or buying specialty servicers.

Many Wall Street firms believe that the boom in nonprime/subprime is here to stay. Recently, Morgan Stanley agreed to buy Saxon Capital, a top 20 ranked subprime servicer, while Deutsche Bank inked a deal to buy a large prime lender (MortgageIT) and a small California nonprime lender. A few years ago, subprime accounted for 10% of all U.S. originations. Today, the share is up to 25%.

However, the phrase "subprime" or "nonprime" has morphed somewhat and also might refer to "exotic" mortgages including payment-option ARMs and interest-only loans, as well as stated-income mortgages where the lender does not ask for income verification from the borrower.

By purchasing the actual originators of subprime loans, Wall Street hopes to lock-in a guaranteed source of loans they can securitize.

According to figures compiled by MSN and the Quarterly Data Report, FFFC ranks 10th among subprime funders and is on track to fund $24 billion this year.

National City said it would book a $1 billion, pretax gain on the sale of the three units. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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