Amro Exits Mortgage Outsourcing
Shenn, Jody, American Banker
ABN Amro Mortgage Group Inc. is discontinuing a business line in which it handles the back-office origination work on loans that community banks sell to it.
Executives at the Ann Arbor, Mich., unit of ABN Amro Holding NV confirmed this week that the company started shutting down the business last month -- around the same time Bank of America Corp. said it decided to close a big mortgage outsourcer it had inherited from its purchase of MBNA Corp.
B of A had found from a short-lived joint venture, which it shuttered last year, that potential customers were reluctant to outsource to another retail banking company. ABN Amro's reasons for quitting mortgage outsourcing are more complex and partly reflect the risks of market swings that customers transfer to their vendors.
Nevertheless, several specialists say they expect lower volume and profitability to continue to push home lenders to outsource. For these outsourcers, the exit of two rivals only adds to their confidence. (See sidebar.)
ABN Amro Mortgage says getting out of the outsourcing business will actually bring it more business of the traditional correspondent sort, which it previously did not seek from small financial institutions.
The failure of its outsourcing model stemmed from two issues, Michael Griffith and Chuck Reed, the senior vice presidents who oversee bank correspondent relationships at ABN Amro Mortgage, said in an interview Monday.
Small customers (especially those that had not been offering mortgages previously and had little expertise in selling them) did not produce enough volume to create the scale that would make the relationships worthwhile for ABN Amro, they said. Midsize ones mostly kept their own back-office staff, so they never fully reaped the benefits of a relationship that cost them more than a straight correspondent one.
ABN Amro never sought to sign up large banks for the outsourcing, which included sales technology, and most of the midsize ones it did the work for also sold loans to other investors, the executives said. Many of the midsize correspondents turned to it for outsourcing only when they could not handle the still-high volume at the tail end of a multiyear origination boom, they said.
Lower volume this year appeared likely to escalate the issues with both sets of customers, the executives said.
Prudential Home Mortgage Co. pioneered the idea of doing back-office work for correspondents in the early 1990s, and other lenders "have gotten in and out of the business," said Mr. Reed, who heads the part of ABN Amro Mortgage's correspondent division that deals with large financial institutions. Getting correspondents to fully commit to (and stick with) outsourcing is "the piece of the equation that hasn't ever quite fit together."
ABN Amro pilot tested its outsourcing business, InterFirstlink, in late 2002 and rolled it out widely the next year, touting the lender's guaranteed, single-price closing costs and intuitive origination software. Volume at the lender's financial institutions group, which handled that work, fell 12% last year, to $377 million, after more than doubling in 2004. …