John R. Wise, the quick-to-smile president of Weyerhaeuser Mortgage, could be excused for wearing a frown these days.
Last week he inherited responsibility for Republic Federal Savings & Loan Assn., a sick thrift institution that was bought by the parent of his Woodland Hills-based mortgage banking company. Wise and his staff are taking on the daunting task of nursing the S&L; back to health and dovetailing its operations with Weyerhaeuser Mortgage’s.
Weyerhaeuser Mortgage’s new mission marks a potentially challenging departure for the company. Long known as a successful, middle-of-the-road company in an industry of middlemen, Weyerhaeuser Mortgage now is indirectly entering a similar, but more volatile, business.
Wise, nevertheless, appears to be buoyant about the assignment. He said Republic Federal will give Weyerhaeuser Mortgage a vehicle for offering adjustable-rate mortgages, a market in which mortgage bankers generally do little business.
Furthermore, Wise said, he is convinced Weyerhaeuser Mortgage’s expertise in selling mortgages and in other aspects of real estate finance will invigorate Republic Federal.
“We understand interest-rate risk, interest-rate volatility and the secondary market, and all of these are tremendous assets in managing an S&L;,” Wise said.
Although Weyerhaeuser Mortgage’s foray into the S&L; business is an important part of its effort to expand, Republic Federal will be a small cog in the overall operation. Weyerhaeuser Mortgage is one of the nation’s five largest mortgage banking companies, servicing $9.1 billion in loans.
It employs 1,200 people, including 500 in Woodland Hills, and last year reported profits of $17.2 million, up from $14.1 million the year before.
Founded in 1955 and owned since 1969 by Weyerhaeuser Co., the wood products giant based in Tacoma, Wash., Weyerhaeuser Mortgage previously contented itself with focusing on the relatively sedate mortgage banking business.
James M. Wooten, president of Dallas-based Lomas & Nettleton, the nation’s largest mortgage banker, said Weyerhaeuser Mortgage is “not a daring organization that would bet all of its chips on one thing.”
Like other mortgage bankers, Weyerhaeuser Mortgage is an intermediary between home buyers and developers who need mortgage loans and investors who are willing to put up the money. Mortgage bankers issue loans to borrowers and then sell the mortgages, or securities backed by mortgages, to institutions such as thrifts, insurance companies, pension funds and federally sponsored mortgage agencies such as the Federal National Mortgage Assn., commonly known as Fannie Mae.
They typically make most of their money on the fees they receive for collecting mortgage payments from borrowers and turning them over to investors. One of the industry’s leading concerns is the nation’s mortgage delinquency rate, which reached a record high during the first quarter of 1985 before declining in recent months.
When homeowners don’t pay off their home loans, mortgage bankers bear the expense of foreclosing and of paying off investors until mortgage payments resume. Despite the delinquency problem, mortgage bankers say, strong sales of new and existing homes will make this a good year for the industry.
Much of Weyerhaeuser Mortgage’s business is almost handed to it. Wise said that about 25% of Weyerhaeuser Mortgage’s revenue is brought in by a sister company, Pardee Construction, which builds homes. In turn, another large part of Weyerhaeuser Mortgage’s business is selling homeowners’, life and accidental-death insurance to its mortgage customers.
Jumped at Opportunity
Weyerhaeuser Mortgage stood out somewhat from its counterparts in the mid-1970s when it started aggressively buying mortgage servicing agreements from other bankers and lenders. Given the high expense of issuing mortgages and the low price of the agreements at the time, the company’s executives pounced on the opportunity to buy new accounts.
In fact, after Weyerhaeuser Mortgage suffered declining profits in 1980, the company began closing some of its branch offices while it kept on buying servicing portfolios.
Over the last two years, however, Weyerhaeuser has reversed direction and is again opening new offices. Its network now consists of 52 branches, most of them in the South and West.
“They swung one way and the industry did not, and then they came back to where the preponderance of the companies were,” Wooten said.
Wise said the company’s decision to change its course was prompted by the rising prices for mortgage-servicing portfolios and the improved outlook for the housing market. The new strategy prompted Weyerhaeuser Mortgage’s acquisition last year of Mason-McDuffie Mortgage, which had a chain of 22 offices.
To broaden the services it provides investors, the company earlier this year sponsored its first real estate investment trust. REITs, as they are called, allow investors to put money into diversified real estate portfolios by buying stock.
New Capital Injected
Wise said last week’s purchase of Republic Federal by Weyerhaeuser Mortgage’s parent, Weyerhaeuser Real Estate, stemmed both from a desire to expand the branch office network and to provide customers more financing options. To buy the S&L; and win regulatory approval, Weyerhaeuser put $15.2 million in fresh capital into the institution and agreed to keep its net worth at the regulatory minimum for an undisclosed period.
The S&L;'s recent history wouldn’t ordinarily make it an attractive acquisition candidate. During the 18 months ended June 30, it lost $9.8 million, wiping out nearly all of its net worth.
Wise said Altadena-based Republic Federal, which has $657 million in assets and employs 220 people at 15 offices in Southern California, suffered from loans it made for condominium developments shortly before that market collapsed. He said Republic Federal’s substantial size--it is the state’s 48th largest S&L--and; its locations were among the reasons it was acquired.
Analysts and competitors noted that the acquisition will give Weyerhaeuser Mortgage a new source of funds, the deposits that are taken in by Republic Federal. Some questioned the value of acquiring an S&L;, however, even though marriages of mortgage bankers and other financial companies are commonplace.
Lower Rates Increase Value
“Thrifts aren’t all that attractive unless you’re convinced that short-term interest rates are going down,” said Nancy L. Young, an analyst with the Cyrus J. Lawrence securities firm in New York. The lower rates increase the value of an S&L;'s fixed-rate loans and securities.
But, Young added, “If you take a troubled company and turn it around, you could have a dramatic bottom-line effect.”
Not only will Wise and his staff have to figure out how to turn around Republic Federal, they also will need to learn how to cope with the greater risks of the industry. By selling their loans, mortgage bankers avoid the risk of holding assets that fluctuate dramatically in value.
S&Ls; often do that too, but they also keep many mortgages on their books as assets. The continuing crisis in the S&L; industry largely involves thrifts that were stuck with portfolios of low, fixed-rate mortgages when interest rates took off several years ago.
But Wise, 44, who was named chairman and president of Republic Federal and who joined Weyerhaeuser 17 years ago as a branch manager, downplays the potential for trouble. He said most of the problem loans already have been accounted for and that the institution is essentially sound.
Gerry Findley, a banking consultant and editor of the Findley Reports banking publication, said, “They’ll get a good-sized institution that’s pretty clean. It just needs capital.”
To Continue as Separate Units
Wise said the S&L; and the mortgage company will continue as separate units, largely to maintain Republic Federal’s identity with customers and to simplify dealings with the federal regulators who supervise it. Regulators have watched Republic Federal closely and pushed it to find a buyer because of its scant net worth, a financial institution’s ultimate cushion against losses.
Wise said Weyerhaeuser Mortgage executives would run Republic Federal’s real estate operation, applying their skills in evaluating borrowers’ creditworthiness and in selling mortgages to help Republic Federal.
At the same time, Wise said, having an S&L; will help Weyerhaeuser Mortgage, particularly when interest rates rise. He explained that consumers tend to flock to adjustable-rate mortgages when interest rates are high, and that S&Ls; generally are better able to issue that sort of loan.
Weyerhaeuser Mortgage still will have little cushion against economic ills that hurt the overall real estate industry, but Wise said that doesn’t concern him much.
“The important ingredient is our ability to manage through those cycles, and I think that’s something we do well,” he said.