Want Mortgage Banking Success? Turn Bank Thinking on Its Head
Puff, A. James, ABA Banking Journal
Mortgage banking under the umbrella of a commercial banking company is a compelling strategy with several payoffs for the parent bank.
Fees from loan origination, servicing, secondary marketing, and sale of mortgage-servicing rights are welcome additions to a bank's bottom line. Being able to provide warehousing credit lines-- which back up mortgages awaiting sale into the secondary market--represents a good source of interest income. And being able to offer a competitive line of mortgage products enables the bank to keep customers out of the clutches of competitors, who may grant the customer their mortgage and then woo deposits and other relationships away.
To the mortgage banking operation, starting under the auspices of a mother bank lends instant credibility. It also gives the mortgage bank access to an established retail branch network and to customers who require a "takeout" for home construction loans arranged through the bank's construction lending department. And warehousing lines are almost impossible for the typical start-up mortgage bank to obtain these days; the parent bank's warehouse lines bridge the gap between day one and the time when the mortgage bank has the track record and volume that would attract another lender.
Yet one of the first essential steps to making a go of this strategy may seem unthinkable: You have to stop thinking like a banker.
I run the mortgage banking division for $300 million-assets Sunrise Bank and have been a mortgage banker for over 20 years. In fact, Sunrise and I have been through the process of setting up and running a mortgage banking operation twice, but that's another story.
Why do I say that you have to stop thinking like a banker? Allow me to tell you a few little stories that illustrate the need for autonomy for the bank-owned mortgage bank.
It's like selling cars
My office window looks out onto a large multi-dealer auto mall. The dealerships' sales people are out in the lot hustling all day. When people ask me the difference between commercial bankers and mortgage bankers, I tell them to look out that window. My mortgage banking staff has more in common with the dealers' people than with commercial bankers, because they are, at heart, salespeople.
I don't intend to disparage commercial bankers, but to point out the difference in mindset.
Traditional bank lenders, even residential mortgage portfolio lenders, are trained and encouraged to be deliberative. As much as the bank wishes to make profitable loans, sound credit management requires that the lender be an analyst. Even if the particular bank has some sort of compensation program for lenders, much of their compensation is based on straight salary.
The mortgage banker, by contrast, is a commissioned seller who makes nothing if he or she doesn't bring in loans that will meet the requirements of the secondary mortgage market.
Typically, the back-shop employees who perform the underwriting on the prospective loans brought in by the mortgage bankers render a credit decision within 24 hours of receiving the last bit of paperwork. Secondary market agencies' purchasing standards are clearly defined.
And in our operation we always take a look at potential rejections to see if there isn't some way to adjust the loan's pricing or other factors to make it saleable to the secondary market. Loans that don't conform to the standards of the Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association may still appeal to a specialized investor or mortgage conduit. (About 90% of our operation's loans are conforming.)
Mortgage banking is a fiercely competitive business, involving huge nationwide and regional mortgage banks, local bank-owned and independent mortgage banks, thrift institutions, and traditional portfolio lenders. Mortgage brokers, who may pass on loans to any of these types of lenders, are yet another source of competition. …