Will Insurer Sell Mortgage Unit?

Will the Principal Financial Group pull the rip cord and decide to unload its mortgage division, the nation's 11th largest residential servicer?

For now, the insurance company is neither confirming or denying reports that its mortgage subsidiary, Principal Residential Mortgage of Des Moines, is on the auction block. The division employs 1,500.

Industry sources told Mortgage Servicing News that selling the mortgage company is something the parent has considered. Whether it still intends to sell remains to be seen.

Investment bankers interviewed in recent weeks say they have yet to see an offering book on the company.

PFG also declined to comment to The Des Moines Register, the local newspaper in the city. The Register quoted PFG chairman Barry Griswell as saying in early February, "This is probably not the time to talk about getting rid of this organization." But Mr. Griswell's remarks came at least a month before rumors began circulating about PRM.

But if PRM does become available, that means $256 billion in servicing rights might be up for grabs - $138 billion from Cendant Mortgage, Mount Laurel, N.J., and $118 billion from PRM.

They rank 10th and 11th, respectively, among servicers and have a combined market share of 3.64%.

As MSN went to press, UBS Securities had just issued a report saying PFG could reap as much as $1.75 billion by selling PRM. (The figure represents a gross sale price, not a net gain.)

UBS analysts Andrew Kligerman and Julie Oh value Principal's $118 billion residential servicing portfolio at $1.2 billion to $1.5 billion, and its production arm at $250 million.

The two estimate that the mortgage division had an 11% return-on-equity in 2003 compared to a ROE of 33% the year before.

The analysts note that when they visited the mortgage company in mid-February, EVP Jon Baymiller said then that the unit could average a high-teens ROE over the longer term.

PRM is also the nation's 15th largest funder. In its report, UBS says it is unlikely the company could get more than $250 million for its production "since PFG no longer has a brick-and-mortar retail origination platform."

UBS says that if the insurer does sell the mortgage unit, investors would react positively "since a sale could improve earnings visibility and would make PFG a more pure asset gathering/insurance play."

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