Abstract: Scratch a mortgage banker who works for a bank-owned mortgage banking company and underneath you'll find ... a mortgage banker. Even when they work for an organization whose parent is a bank or bank holding company, mortgage bankers are a different breed. They tend to see themselves as mortgage bankers who happen to work for a bank-owned organization, not as bankers in the mortgage banking business. As a rule, they are more entrepreneurial than commercial bankers. In many ways, their business is even more competitive than banking. Seesaw business. Loan origination, the front end of mortgage banking, has always been at the mercy of market interest rates. When rates go down, more people can qualify for home loans, and consumers with higher-rate mortgages consider refinancing their homes at a lower rate. When rates go up, potential borrowers who don't absolutely need to buy a home tend to stay out of the market. In those times, mortgage bankers must live off the income generated by servicing loans made in better days. Cyclicality of demand is an ongoing problem, says Stuart Feldstein, president of SMR Research Corp., Budd Lake, N.J. Rapid swings in mortgage demand of 10% to 15% are typical, and wider swings are possible, he says. Commercial bank parents most like to see steady, upward-sloping profits, says Robert Gaither, vice-president - secondary marketing, First Union Mortgage Corp., Charlotte, N.C. They are less comfortable with the fluctuations of the mortgage banking business. That's one thing that's difficult, says Gaither, us understanding their culture and them understanding ours. Atyical profit center. The bank-owned mortgage bank plays a funny kind of role in a commercial banking organization. You often can't find numbers on the subsidiary's profitability in an annual report, because they don't have to be broken out separately. Even those figures contained in regulatory reports are often not comparable. Take origination of loans. The traditional school of thought considers this a poor performer. If a mortgage bank maintains its own branch offices to generate retail business, rent and other costs must be paid no matter how strong mortgage demand is. Even if a mortgage bank relies more heavily - on even exclusively - on the originations of other entities, it costs something to bring business in the door. And the typical origination fee - 1% of the mortgage - doesn't cover all the costs involved in origination, according to Gary Bettin of Fleet Mortgage Group., Providence, R.I. loans, on the other hand, can be highly profitable and accounts for the bulk of a mortgage bank's earnings. Yet without originations, there wouldn't be loans to service. Servicing runs off, so unless you have a healthy origination you're dealing with a declining asset, says Howard J. Levine, president and CEO, of ARCS Mortgage Inc., a Calabasas, Calif., subsidiary of The Bank of New York Co. We really make our money on the servicing side, explains Joe K. Pickett, president and CEO, BancBoston Mortgage Corp., Jacksonville, Fla. But Pickett advocates the transfer pricing school of thought on originations. In part, this means that because originations produce servicing, which is profitable, the part of an organization that produces originations should be credited for this income stream. And parent organizations do recognize the value of servicing. In some cases, the need to boost income at one level or another of the organization may dictate that the mortgage bank subsidiary sell servicing to other organizations to generate an immediate return. In this sense, a mortgage banking subsidiary is a cash cow for a bank parent, or for the mortgage bank itself in a slow year for originations. But if that cow is milked now, there's that much less servicing that will be handled by the mortgage bank's processing function - and servicing depends on scale. …
Publication Year: 1991
Publication Date: 1991-10-01
Language: en
Type: article
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