“Should I stay or should I go now… If I go there will be trouble… And if I stay it will be double.”
– The Clash
For bankers, the mortgage business is the ultimate love-hate relationship.
Across the country, most banks are halfheartedly doing mortgages, eking out a minimal profit and wondering whether to stay in or bolt. But fear not, Gonzo readers. Banks can stay in the mortgage business — if they begin to manage it with more discipline. Because it’s budgeting time, I’d like to offer some free advice on how to make money in the mortgage business.
THE BIG PICTURE
Let’s start with a quick update on the mortgage industry:
#1: The mortgage market is the largest credit market in the world.
At $5.5 trillion dollars, it equals the size of all U.S. federal debt. It’s bigger than all U.S. business debt ($4.5 trillion), and blows away consumer debt ($1.2 trillion) by a long shot. Since banks are in the lending business, it’s hard to justify exiting the world’s largest credit market.
#2: It’s an off-balance-sheet game.
Today, 60% of mortgages are either securitized or held directly by Fannie, Freddie or GNMA. Banks hold only 19% of the market; thrifts hold 12%. Many banks still waste precious capital holding mortgages on their balance sheets.
#3: Fannie Mae and Freddie Mac are the Microsofts of the mortgage market.
It’s ironic that the same government investigating Microsoft and Visa for anti-trust also brags about its two monopolistic mortgage players. Their dominance clearly shows up the division of wealth in the industry. Industry leader Countrywide’s $5 billion market capitalization pales in comparison to Fannie’s $80 billion and Freddie’s $50 billion.
#4: Fannie and Freddie are driving industry technology.
About 80% of all mortgage lenders use the Desktop Underwriter or Loan Prospector automated underwriting tools. In addition, future automation like title, appraisal, and flood may also be dictated by Fannie and Freddie policy.
#5: Beneath Fannie and Freddie, the market is consolidating fast to large banks.
Four of the top five players in the mortgage industry are banks. Chase is the top originator with about $175 billion in production, and Washington Mutual is the largest servicer at $500 billion.
#6: The dot.com mortgage players have been a non-event.
The largest, E-LOAN, originates $2 billion – $3 billion per year, making it only the 70th largest originator in the country.
#7: The mortgage market is primarily wholesale.
At the bottom end of the food chain are mortgage brokers, the “taxi drivers” of the industry who originate 70% of all mortgages. These journeymen, armed with cell phones, PCs, and $500 copies of Contour, are tough competition.
WHAT TO DO?
Despite consolidation and government-sponsored monopolies, banks still can operate a profitable mortgage group. Here’s how:
#1: Release the damn servicing!
Banks need to quit reminiscing about the days when they serviced their own mortgages. Yes, George Bailey, it was nice. But now every customer’s mortgage has been sold umpteen times. Meantime, banks can sell the servicing to folks who are willing to pay more today than banks can earn by keeping it. That’s fee income this year and no worries about writing off servicing values. (Bye bye FASB 133!)
#2: Stand up to the loan officers.
Why aren’t bank senior managers miffed when they pay mortgage officers $600 to quote some rates, take a simple 1003 application and throw the deal over the wall to an underpaid processor? Most banks have mortgage officers making more money than most productive commercial loan officers and branch managers. Banks will say their commission structure is standard with the industry, but the industry is insane! Banks should stand up to their prima donna originators. Pay the real gunslingers 50 basis points for new clients, and handle existing customers, inbound calls and walk-ins via an internal channel that pays $150 per closing.
#3: Simplify the organization.
When I visit the local mortgage broker at the strip center between the chiropractor and the dry cleaners, there are only two people in the office: a loan officer and an assistant. Why, then, does a bank’s typical Mortgage Division have folks called Loan Agents, Loan Assistants, Loan Processors, Loan Underwriters, Loan Closers and Post-Closing Specialists? Are we separating hydrogen atoms or selling commodity loans to Fannie Mae?
#4: Mine the current deposit base.
Bank marketing departments talk ad nauseam about cross-selling banking products to mortgage customers. Let’s stop dreaming. Instead, banks should focus on selling mortgages to their deposit base. Analysis conducted by GonzoBanker indicates that banks could double their loan production if only 12% of their depositors who take out mortgages each year threw the business to their banks. How about $200 off processing fees or a trip to San Diego to encourage deposit customers to get their mortgages from the bank?
#5: Push construction and jumbo niches.
One thing banks have that Fannie will never have is feet on the ground to work with local builders, schmooze Realtors and complete construction inspections. Banks can still make good margins in construction lending, but they need to market it more aggressively. Niche banks can also promote portfolio Private Banking mortgages for prospects with strong relationship banking opportunities. Those folks hate doing the Fannie paper shuffle.
#6: Squeeze every penny.
A commodity industry like mortgages comes down to cost control. Unfortunately, most banks do not benchmark their originators, underwriters and processors, nor do they measure origination costs and profit per loan. Those companies that put these metrics on the wall and make improving them a religion always seem to be more profitable.
We’re still in a pretty hot refi boom, and most banks could use some strong fee income for 2002. For GonzoBankers, it’s time to put real discipline into the mortgage business. -spw