Magazine article Mortgage Banking

For Better or for Worse

Magazine article Mortgage Banking

For Better or for Worse

Article excerpt

Commercial banks have been rushing to buy up major mortgage banking firms in recent years. These newly created entities may face a rough future, as big and small players compete for position in changing marketplace.

"IT'S A REAL QUESTION IF THESE will be happy marriages," says Thomas O'Donnell, mortgage banking industry analyst at Smith Barney Inc. in New York. He cites the clash of cultures between marketing-driven mortgage firms and risk-averse banks as challenges for acquiring banks that have sought to merge the two cultures. "There are signs that some banks are having difficulty making it work," O'Donnell adds.

According to Steve Eisman, senior vice president at New York's Oppenheimer & Co., Inc., some bank acquirers of mortgage companies significantly overpaid due to assumptions about future loan volumes and pricing that proved incorrect. Eisman claims that in some of these instances "buyers are not happy."

David Partridge, director of the financial institutions practice at Towers Perrin in San Francisco, says that the high acquisition prices may partly be accounted for by the business optimism and sales ability of mortgage bankers. "I never knew a mortgage banker that didn't think next year would be like this year--plus 20 percent," Partridge says.

Some bankers who listened to claims by mortgage lenders that market share gains would make up for the loss of refinancings now are disillusioned, he adds. As a result, some bank parents "are making life miserable" for top executives in some of their mortgage units, according to Partridge.

For various reasons, several mortgage CEOs resigned from their posts in 1995. David Frank stepped down as head of Chemical Residential Mortgage Corp. in Edison, New Jersey. Mark Korell resigned from GMAC Mortgage Group in Bloomington, Minnesota. Fred Koons departed from Chase Manhattan Mortgage Corp. in Tampa, Florida. Raymond Crebs also resigned as president of Directors Mortgage Loan Corp. in Riverside, California--now owned by Norwest Mortgage Corporation. And John Robbins left American Residential Mortgage Corporation shortly after it was purchased by Chase Manhattan.

Yet hope springs eternal--and there actually are good reasons for these mergers. O'Donnell declares that "mortgage banks are best run as subsidiaries of a large company." Having capital to invest and a low cost of funding helps them get through the downturns, while being able to maximize returns during good times.

O'Donnell also says that purchasing mortgage banks is "the best of a lot of so-so alternatives" for commercial banks interested in consumer lending. Banks' share of financial assets has fallen from more than 35 percent in 1980 to about 25 percent in 1994, according to Federal Reserve statistics.

Banks hope to be able to sell credit cards, deposit accounts and car loans to consumers brought in through their mortgage subsidiaries. Yet to date most observers agree that this cross-selling strategy has not worked for most banks or stand-alone mortgage firms. "It seems logical," Partridge notes. "But borrowers don't consider a mortgage to be a `relationship' product."

Profit squeeze

Some banks are reconsidering their investments, says Tom LaMalfa, president of TSL Consulting in Shaker Heights, Ohio. He explains that some well-run mortgage firms are finding their return on equity (ROE) to be 8 percent or less for the parent. "They could shut down, buy Treasury notes, and get a better return," says LaMalfa. Instead, he adds, those companies are selling servicing to keep stock prices up and aggressively capitalizing servicing values.

Is this simply the product of a short-term slowdown? Senior executives note that the industry's running rate fell by half in 12 months, starting at the end of 1993. Observers say bank acquisitions made around this period suffered both from poor timing and an underestimation of the degree of cyclicality in the mortgage business. …

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