By Swegle, Robert W.; Votta, Christopher D.; Leeds, David W.
American Banker , Vol. 159, No. 103
In the last few years, commercial banks have shown an impressive appetite to acquire mortgage banking operations. Some transactions, such as Chemical's recently announced agreement to purchase Margaretten Financial Corp. and PNC Bank Corp.'s 1993 acquisition of Sears Mortgage placed those acquirers among the largest mortgage bankers.
Other significant transactions, including Keycorp's acquisition of Coldome and Chase's acquisition of Troy & Nichols, have demonstrated a solid commitment by commercial banks to the business of mortgage banking, a commitment that appears to be lasting.
Indeed, industry pundits almost unanimously predict further consolidation of the mortgage banking industry, citing commercial banks as the organizations with some of the most voracious appetites.
Recognizing the banking industry's penchant for smooth, predictable earnings, some may question the sense of plunging into the mortgage banking business. The ride has been anything but smooth recently.
Mortgage originators are doing quite well, while some owners of purchased servicing rights have huge charges against earnings because prepayments vaporized their servicing assets. But a closer look at the situation reveals some compelling reasons for commercial banks to enter or expand their involvement in mortgage banking.
For many years bankers have complained about the erosion of their traditional product base, commercial loans. U.S. banks have steadily lost this business to the commercial papermarket, investment banks, foreign banks, and a host of other competitors.
Spreads Adversely Affected
And even though banks have generally benefited from the dramatic decline in interest rates in the past few years, this intense competition is beginning to have an adverse effect on interest rate spreads. To address these adverse trends, bankers have sought to expand their offerings of products and services that generate noninterest revenues.
Mortgage banking- once dominated by thrifts and independent mortgage companies has become increasingly attractive. In addition to the interest spread that is earned between the time a loan is funded and sold to investors, mortgage banking operations can produce origination and marketing revenues, as well as loan-servicing income.
An operation that has both origination and servicing capacity can, to a large degree, protect itself from interest rate changes. That is, as interest rates decline, origination volumes (and revenues) tend to increase. However, in an increasing rate environment, mortgage prepayments generally slow, enhancing the value of the servicing portfolio and producing greater servicing revenues.
Thus, a fully integrated mortgage banking operation, with both efficient origination and efficient servicing capabilities, can provide the steadier earnings that banks strive for.
Commercial banks also have some inherent advantages over many of their competitors in the mortgage industry. One of the principal advantages is the substantial capital that banks have available to invest in technology. As the mortgage banking industry becomes increasingly competitive, it will be critical to effectively deploy technology to gain cost and service advantages.
It is commonly observed that the mortgage origination process is too slow and too manually intensive. …