SPS Going to CSFB?

The rise of Wall Street firms as the primary owners of subprime mortgage servicers continues, with Credit Suisse First Boston entering into a deal that may lead to its purchase of Select Portfolio Servicing, formerly known as Fairbanks Capital.

SPS recently entered into a letter of intent with CSFB and its mortgage affiliate, DLJ Mortgage Capital.

One of SPS's principal owners, mortgage insurance giant The PMI Group, said the terms of the proposed transaction give CSFB the option to acquire 100% of the outstanding stock of SPS. If a deal is reached and CSFB buys the firm, the parties expect that the transaction will be consummated within the next six months.

Under the terms of the agreement, CSFB will sell mortgage servicing rights with an aggregate unpaid principal balance of about $3 billion to SPS by June 30, with an additional $3 billion to be sold to SPS by Dec. 31 if CSFB does not exercise the option to purchase SPS.

CSFB is a big player in the MBS and ABS underwriting business. CSFB ranks fourth in MBS underwriting and third in underwriting of home-equity deals, according to Thomson Financial.

Based on the financial terms of the proposed transaction, PMI realized a capital loss relating to its investment in SPS of approximately $13.3 million after tax in the fourth quarter of 2004. Following the recognition of the capital loss, the total value of PMI's investment in SPS is $126.2 million, PMI said.

PMI currently owns 64.9% of the equity in SPS. While terms of the deal were not disclosed, PMI's data suggest that SPS as a whole is valued at about $194 million.

Mortgage insurers were once rushing to get their hands on skilled servicers of lower credit quality mortgage loans, but that trend seems to have stalled.

The PMI Group left little doubt that it had lost its appetite for subprime mortgage servicing after SPS, then known as Fairbanks Capital, became embroiled in a controversy with regulators and consumer groups regarding its loan collection practices.

Since reaching an agreement with regulators to settle the case, SPS has hired new management and reformed its servicing procedures.

In a statement released to the media, Brad Schuster, president and CEO of PMI Capital Corp., said that PMI had announced in 2003 that it planned to "de-emphasize" the lender services segment of its business.

"In furtherance of this objective, we liquidated our interest in the Truman Fund, and sold American Pioneer Title Insurance Co. If and when the proposed SPS transaction is consummated, it will complete PMI's exit from lender services," Mr. Schuster said.

SPS said that any transaction related to the ownership of SPS will be subject to due diligence by all parties and the execution of definitive agreements.

In addition, the deal is contingent upon the receipt of governmental and third-party approvals. SPS services approximately 270,000 nonprime credit quality residential mortgage loans from facilities in Salt Lake City and Jacksonville, Fla.

CSFB and SPS do have an existing relationship. In September, SPS said that CSFB extended a $200 million credit facility that SPS uses to finance servicing advances and the purchase of mortgage servicing rights with an increased term of 18 months.

A spokesperson for CSFB said the company had no further comment on the agreement beyond what is in the news release. He said DLJ Mortgage Capital is part of CSFB's mortgage securities business.

Meanwhile, only two mortgage insurers have a significant ownership interest in servicing subprime mortgage loans. Radian Group and MGIC Investment Corp. both have an equity interest in C-BASS, a New York-based firm that invests in credit-challenged mortgages and owns Litton Loan Servicing of Houston. Litton serviced 211,000 loans with an unpaid principal balance of approximately $23 billion as of Oct. 31.

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