Academic journal article ABA Banking Journal

Mortgage Banking's Gone to Pieces, Which Piece Do You Want?

Academic journal article ABA Banking Journal

Mortgage Banking's Gone to Pieces, Which Piece Do You Want?

Article excerpt

As anyone who's ever eaten peanut brittle knows, the only practical way to approach the rock-hard confection is to slam the slab on a tabletop and pick out the shards of candy and peanuts that suit one's fancy.

Since the passing of the refinancing booms, the mortgage banking business has turned into something resembling a chunk of brittle. For many banks in the field, a once-simple business has split into pieces that must be selected according to appetite and digestive ability.

"The pricing of loans got so tight that almost everyone was losing money on originations," observes Bob Zizka, managing vice-president at First Manhattan Consulting Group, New York. The resulting impact on earnings "has scared many banks out of the business."

Even if originations remained palatable enough, Zizka says some bankers have come to think of the servicing end of the business as an "interest-only" mortgage strip in disguise. Once they saw servicing rights as a quasi security that also called for a scale operation to handle efficiently, says Zizka, they concluded they couldn't build the scale and didn't have the internal skills to hedge.

"Clearly, there has been an exodus," says Ray Dinius, executive director of Countrywide Servicing Exchange, a servicing-brokerage subsidiary of California-based Countrywide Credit Industries, Inc.

Yet the evolution that's taken place over the last year or so hasn't always meant complete bank withdrawal from mortgage banking. Instead, the industry has been going through a rationalization-institutions picking the brittle they care for under current conditions.

"Mortgage banks are beginning to realize that they can't be all things to all people," says Tom Trotter, president of Wachovia Mortgage Co. In many cases the adjustments have been made so recently that bankers can't say with finality that they made the correct decisions, only that they believe they are on the right track.

Rethinking originations

To First Manhattan's Zizka, the only appropriate way to weigh decisions regarding the origination side of the business is in conjunction with secondary-mortgage-market operations. "They are inextricably linked," says Zizka. It is possible to continue to do originations without running a managed pipeline operation, but Zizka says smaller institutions that sell their production into the secondary market on a "best efforts" basis, pay a price.

Even for larger shops, a successful origination operation depends on building and maintaining the volume necessary to maximize efficiency. This has led to some rethinking.

At Wachovia Corp., the $9 billion servicing portfolio of Wachovia Mortgage Co. was sold to GE Capital Mortgage Services Inc. in May. Tom Trotter says the firm's market research indicated that being serviced by the originating lender was actually low on customers' list of priorities. And beefing up the size of the servicing portfolio-- small compared to the "megaservicers," as the big firms are called--would have required costly investments in both acquisitions of servicing and equipment to process it.

So Wachovia elected to concentrate on originations, chiefly through bank and residential loan offices in its four-state network.

The bank is also striving to boost originations obtained through the bank's "Wachovia on Call" telephone marketing program. Other banks have started pushing remote mortgage lending through such programs as well, with varying degrees of success. To bolster the overall effort, Wachovia Mortgage invested in a new automated mortgage application system

Other bank-owned mortgage banks that decided to exit the servicing business have trimmed operations more severely.

At Bank of New York, for example, an attempt to sell off its California-based ARCS Mortgage Inc. faltered and ARCS has instead been liquidated, sold off in pieces. The company, in addition to wholly leaving the servicing business, decided to restrict its origination business to the New York tri-state area. …

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