Outsourcing Trend Gaining Momentum in Mortgage Biz
Julavits, Robert, American Banker
Highlighting an accelerating shift in the mortgage industry, American Home Mortgage Holdings Inc. wants to become a major player in the home loan outsourcing business.
The New York lender, which began its origination outsourcing unit less than a year ago, currently provides the service to about 25 banks, but executives predict its customer list will increase by as much as 300% by yearend.
Donald Henig, the executive vice president of new sales channels for MortgageSelect.com, American Home's online mortgage channel, said demand from banks spurred the company to start the unit.
"It started because there was a need," Mr. Henig said. "We didn't know how great the need was, but when we sat down and talked about it, you could see right off the bat that it made sense for the banks to do this."
Outsourcing generates only a small percentage of American Home's overall revenue, but by creating the unit, it joined a list of companies seeking to profit from the industry's frustration over the challenges of mortgage lending.
Banks have long been plagued by a mortgage dilemma: They must offer the product or risk losing customers, but with the feast-or-famine business cycles that follow interest rates moves, home loan lending rarely produces steady profits -- especially for small and midsize banks.
As a result, more and more financial services companies -- from community banks to FleetBoston Financial Corp. and PNC Financial Services Group Inc. -- are hiring other companies to run their mortgage operations. Indeed, because originations are expected to plummet from last year's record of $2 trillion, industry players expect the outsourcing trend to accelerate this year.
"We continue to see a strong interest by banks, both large and small, in outsourcing their mortgage platform," said Bob Andwood, the senior vice president of sales and account management with Cendant Mortgage of Mount Laurel, N.J.
More and more financial institutions are looking at their mortgage businesses and deciding that not only are they unprofitable, but the credit and hedging risks are just not worth it, he said. "They view the option of outsourcing to us as far superior economics than trying to do it themselves, and smaller banks are deciding that it's better to have someone with scale handle the mortgage business for them."
In addition to the Cendant Corp. unit, which is one of the largest outsourcers, Resource Bancshares Mortgage Group Inc. of Columbia, S.C., and Alliance Mortgage Co. are also recent converts to the private-label lending trade.
Resource started marketing its private-label service last year to small banks that previously did not originate mortgages. Steven F. Herbert, Resource's chief financial officer, said officials were excited over the progress the business made in one year. After $22 million of originations last year, it originated $14.4 million for private-label clients in just the first two months of this year.
"We're seeing good growth and we're optimistic that this will prove to be a very profitable channel," Mr. Herbert said. "We've seen great reception to what we're offering."
(NetBank Inc. announced a deal for Resource in November. It is expected to close this month.)
Alliance, a unit of the Jacksonville, Fla.-based Alliance Capital Partners LP, now relies on lending and servicing through other companies' brands to generate much of its mortgage revenue.
Like Cendant, American Home has found strong demand for outsourcing, particularly now that the mortgage industry is coming off its best year ever, Mr. Henig said.
"The mortgage business in general is tough to make money in," he said. …