Academic journal article ABA Banking Journal

The Merger Alternative: How Partnering Can Help You Survive

Academic journal article ABA Banking Journal

The Merger Alternative: How Partnering Can Help You Survive

Article excerpt

Mortgage lenders have always found ways to expand growth and cut costs through profitable alliances. Exclusive connections with real estate ventures and title companies or special relationships with law firms to close loans are common. But now the partnership landscape is undergoing rapid and dramatic change, with virtually no in-house task exempted. A plethora of lender service institutions (LSIs) now are offering subcontract servicing, contract underwriting and wholesale lending, to cite just a few of the new services now available to lenders.

The companies who provide these support services, whether they be small ones or large ones like Countrywide or EDS, are still seen by some traditional bankers as competition to be feared. But more and more lenders are finding it easier to "join 'em than fight 'em" by forming mutually beneficial strategic alliances.

Fannie Mae and Freddie Mac, still the biggest partners of them all, paved the way by showing lenders how they could grow their businesses without extra capital. Then the revolution in information technology improved communications, so that companies could partner across vast geographic distances, making it possible for lenders, partners and their employees to work together in a far more exacting and seamless way. Some day it may even be possible for a single person to harness the new technology to a series of partners and produce a virtual bank at home.

Importantly, partnerships can become an alternative to getting lost in a lethal whirl of mergers, divestitures or bankruptcies. The right alliance keeps a lender in control of his company while getting the right kind of business support to stay alive.

What partnering offers

A merger of financial institutions is usually about obtaining critical mass. A divestiture occurs when a bank wants to get out of an unprofitable or uncomplementary business. Partnering combines the best of both strategies. It can give a mortgage lender the ability to reach more customers even when it is lacking the in-house expertise necessary to serve them.

Although outsourcing and partnering can overlap, some major distinctions divide the two. "Outsourcing is paying for a service," says David Kittle, president of Associates Mortgage Group, Inc. in Louisville, the largest non-bank lender in Kentucky. "Partnering involves sharing risk and liabilities, but also profits and rewards." Kittle says partnering is better than a merger because it's harder, if not impossible, for a lender to nullify a merger. You can break up a partnership. "You can test it, tweak it and determine what you want to get out of it."

"Strategic partnering is outsourcing with an attitude," says Jeffrey Briggs, director of servicing operations at Wendover Financial Services Corp. in Greensboro, North Carolina, a fully-owned subsidiary of EDS. "It's not just getting rid of some bank function, but an arrangement with someone who can execute a task and work to develop strategies to leverage a bank's strength."

Wendover enables lenders to do business without investing in infrastructure and technology. It originates and services all kinds of loans, including secondary market loans, with mortgage lending one of its core competencies. "We get involved in a bank's planning and take it where it wants to go," says Briggs.

Possibilities in partnering are limited "only by the capabilities and imaginations of the partner. With EDS, we have high tech back-up and a cast of people that can do almost anything."

Associate Mortgage Group is a third-party loan originator that sells loans on the secondary market. It partners with small banks that need mortgage lending expertise and, in exchange, the banks provide equity lines of credit to AMG's mortgage customers.

AMG's David Kittle says these are places where the mortgage operation was the stepchild that never saw its potential reach fruition. "I can train their people to be mortgage bankers and they can look at the mortgage operation for what it is, another way to generate fees and retain customers. …

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