The New Zealand mortgage manager Foundation Mortgage Securities announced yesterday that it had signed a contract to outsource the servicing of its residential mortgage portfolio to Bluestone Servicing.Bluestone, which has a servicer rating of 3+ (fully acceptable) from Fitch will handle the core and special servicing of Foundation's $170 million book.Bluestone Group chief executive, Peter McGuinness, said the Foundation book was in good shape, with arrears around five per cent, and Foundation was an ongoing operation with institutional funding.This is the second servicing deal Bluestone has done since it set up a servicing division late last year. On August 22 it announced that it had bought a $130 million mortgage portfolio from the receiver of Provincial Finance, PricewaterhouseCoopers. It was another New Zealand deal.The two deals are very different. The arrangement with Foundation is an ongoing third-party servicing contract, while the Provincial deal is a distressed debt acquisition.McGuinness said Bluestone bought the Provincial portfolio in partnership with an unnamed hedge fund. The partners paid "between $20 and $30 million" for the portfolio.The Provincial portfolio is made up of unsecured car loans and at the moment 80 per cent of the loans are non-performing. McGuinness said the high level of non-performing loans was partly due to the quality of servicing to date."When PwC moved in as receiver 18 months ago they decided they would run the business themselves. A couple of months ago we started talking to them about buying $40 million of charged-off debt and in the end we came up with a bid for the lot."McGuiness said a lot of small lenders whose operations have been disrupted by funding problems have adopted a strategy of generating revenue by servicing their portfolios in the hope that this activity would carry them over until they could get access to funding again."What some of them discover is that their systems are not good enough, especially if they have to get into special servicing (collections, mortgagee sales, legal action). Most of them have invested heavily in product and distribution, less so in their servicing platforms." McGuinness said he expected to see deal flow in Australia this year. "A number of groups are looking at their options. Our view is that you need a minimum $500 million to support the infrastructure necessary to make it work."Bluestone is not the only group aiming to build a servicing business. Earlier this year Perpetual and Pepper teamed up to take over the servicing of Allco's Mobius white label mortgage operation.Pepper chief executive Patrick Tuttle said earlier this week that the company was "recruiting heavily" on the asset servicing and trust management side of the business. Tuttle said: "This is a growth story for our business and counterbalances the reduced lending growth which we have recently experienced, like most non-bank lenders."