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Nonbanks Hunting for Depositories

One of the great ironies of the financial crisis is that lenders posting the strongest profit margins over the past 18 months have been doing so by funding residential mortgages, the product at the center of the crisis.

And further extending that irony is that nonbank lenders-those who have weathered the storm and even thrived-are now lining up to buy depositories. (Nonbank subprime lenders were among the worst abusers of nonprime loans but today's survivors have thrived by sticking to conventional and government financing.)

Midsized nonbanks that have entertained or are currently exploring the idea of purchasing a depository-be it a bank or thrift-include CMG Mortgage, San Ramon, Calif., Envoy Mortgage of Houston and Total Mortgage Services, Milford, Conn. Although these midsized, privately held firms want to own a bank, none have actually pulled the trigger, and for various reasons. And they are far from alone when it comes to being in the market. Investment bankers interviewed by National Mortgage News over the past week claim that "many" nonbanks are in the hunt, focusing-though not exclusively-on undercapitalized depositories that would benefit from an inflow of capital. The money being pledged comes from the profits earned over the past 18 months, a period characterized by a wide yield curve and a dearth of competition.

As for the reasoning, that's simple: by owning a depository these nonbanks can self-fund and forgo taking out large warehouse lines of credit. Some, such as Envoy Mortgage, would love to enter the servicing space as a "counter hedge" to originations. Rick Thompson, CEO of Envoy, declined to comment specifically about his firm's plans but confirmed that buying a bank is among the items on his "to-do" list. "I can't talk about anything right now," he said.

Chris George of CMG, who like Thompson has been a mortgage banker for well over two decades, also would like to own a bank. In fact, he spent several months looking into it, but recently shelved his plans. He declined to say why. In the meantime, CMG, a retail/wholesale lender, is continuing its expansion plans by opening new branches outside of its home base of California. It also is open to acquisitions of existing nonbanks.

John Walsh, who heads TMS of Connecticut, readily admits that he's been looking at a depository purchase but has been frustrated by the process. The fast-growing nonbank also has explored the idea of going the "de novo" route but was unhappy when regulators placed tight limits on what business activities he could engage in.

He looked at existing banks that are in need of capital but like many potential buyers, his biggest fear involves "the would-be baggage I might be acquiring," namely what commercial exposure might be lurking on the balance sheet. He added that when purchasing another firm, "it all sounds great on paper but it's a lot more difficult than you think, plus you need a lot of capital."

Other firms have gone down the "let's buy a bank road" only to get stonewalled by the Federal Deposit Insurance Corp. David Olson, who manages Access Research of Columbia, Md., said he hears of "nonbanks looking at banks" all the time but "I don't hear of any deals getting done." The FDIC, he said, "is making it tough to get anything accomplished."

Some mortgage executives, requesting their names not be used, said the FDIC requires extensive business plans from buyers of troubled institutions and clearly wants experienced commercial bankers to be put in charge of day-to-day operations-and not mortgage managers. "And if they have any subprime history at all, that's a red flag," said one West Coast executive.

This executive, who also did not want his name publicized because he still hopes to complete a deal, said he has been exploring a bank purchase for well over a year and has hired attorneys and met with FDIC officials in Washington. He estimates that he has looked at least 20 banks, mostly in California.

Walsh remains interested in buying a bank but now appears to be in no hurry. He is contemplating "partnering" with a bank but plans to expand by obtaining licenses to fund in new states. Currently TMS originates in 21 states.

"By yearend we hope to be in 45 or so," he said. "And I don't need a bank charter to do that."