The "restructuring" of Franchise Mortgage Acceptance Corp., where parent-company Bay View Capital Corp. is shutting down all origination operations and slashing approximately 140 jobs, should not have an impact on the outstanding securities in the near term, according to several industry sources.

As stated in the company's press release and a subsequent conference call, Bay View doesn't intend to cut its servicing, which, as FMAC told ASR in July, exceeds $3.4 billion, including $1 billion in balance-sheet franchise loans that FMAC hadn't been able to securitize. Bay View will keep its approximate 40-person servicing team intact, though the company indicated that it's looking to sell the servicing unit, and has already been in talks with potential buyers.

However, according to one industry professional, Bay View might have a difficult time selling the outstanding portfolio of loans for the same reasons that the company fell into trouble in the first place.

First, according to the source, Bay View was originating loans with low, unmarketable coupons in order to compete with new market entrants like GE Capital, which isn't reliant on securitization or whole-loan sales to fund its portfolio. Next - and most devastating - Bay View traded out of FMAC's interest-rate hedge, and booked the gains on its 1999 financial statements, at which point several of FMAC's senior managers left the company.

"It was bad asset/liability management," the source said. "Yeah, the loans were problematic to begin with, where it was questionable as to whether they'd be profitable. But what happened is that interest rates went against them in the spring, which is when they put their hedges back on, and locked in the loss."

Meanwhile, with regard to the quality of servicing in the near term, one asset-backed analyst suggested that FMAC's portfolio management team is probably more motivated than ever to service the assets dilligently.

"Anyone looking to buy the servicing is going to be looking at the staff and how they've done," the analyst said. "I don't think anyone's going to slack off at this point. In fact, they'll probably redouble their efforts."

Though Bay View laid off most of FMAC's origination staff, it's said that there are retention agreements with regard to the servicing team.

However, the source added, "If they don't find a buyer for their servicing, it's possible that their portfolio might suffer down the line."

Also at issue: some have speculated that - due to the vast migrations from FMAC's management over the last year - the existing FMAC servicing does not have the franchise loan expertise of the old FMAC, which could create problems.

According to Tom Pearce, chief executive officer at Peachtree Financial, Peachtree has been approached by a number of parties interested in acquiring the FMAC portfolio, with the intent of partnering with Peachtree, currently the only servicer with a rating in franchise lending from Standard & Poor's Ratings Co.

"We're too small to take that [portfolio] on our balance sheet," Pearce said. "But several larger entities have approached us about partnering with them and using our servicing platform and industry expertise to take advantage of the FMAC opportunity."

Bay View announced the acquisition of FMAC in the spring of 1999, and has not issued franchise loan-backed securities into the ABS market since late 1998. However, in April of this year, FMAC managed its own on-balance sheet securitization, worth approximately $270 million, likely to receive regulatory capital relief, a source suggested.

In May, Bay View announced that it had retained Merrill Lynch to assist it with the restructuring of FMAC, as it sold off Bankers Mutual, a $43 million mortgage unit of FMAC (ASR 6/12/00).

As for why Bay View decided to restructure and not sell, one franchise industry watcher said, "I don't think this really surprised anybody. In this market, it's just touch to get rid of commercial lending entities, and they've had a few hiccups here and there. And I can see why selling it could be a difficult endeavor."

Bay View will continue asset origination in its home-equity, small business, and auto groups, according to a company spokesman.

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