Lenders Should Expect Another Tough Competitive Year

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The mortgage market appears to be stabilizing now but it has been a rough transition for the industry over the past 12 months, according to Ben Cowen.

Last October, the president of BOK Financial Mortgage was warning the environment would be challenging due to mounting regulatory costs and the drop-off in refinancings in the midst of a slow purchase mortgage market.

"The first quarter was really tough on the production side," Cowen said in an interview. Gain-on-sale margins were falling and there were fears about how low they would go. Fortunately, margins stabilized and even rose in the second quarter. "That is because everyone is recognizing that their costs to produce are higher and you can't afford to lower them," he said.

Cowen's mortgage group is part of BOK Financial Corp., a Southwestern regional bank based in Tulsa, Okla. He is responsible for the retail, correspondent and Internet channels, which originated $1.1 billion in single-family loans in the second quarter, up from $740 million in prior quarter.

He launched an Internet lending channel, called HomeDirect Mortgage, last fall. "We are funding a fair amount of volume and finding some good margins," Cowen said. HomeDirect is based in Kansas City and has 50 employees.

The correspondent channel was started two and a half years ago and buys loans solely from banks and credit unions. BOKF Mortgage services the loans under a neutral name and pledges not to cross-sell any of its bank products to the correspondent's customers. The mortgage group leader expects the correspondent channel will purchase over $2 billion in loans this year.

BOKF's second-quarter financial report shows 41% of originations came through the correspondent channel and 7% through the new Internet channel.

Both channels give the mortgage banking group access to markets nationwide.

Looking ahead, the mortgage group president doesn't see origination volume picking up much. It is going to be very competitive, Cowen said. "You are going to have to gain market share to grow your business over the next year or two."

He doesn't expect a rollback in regulatory compliance requirements or reductions in Fannie Mae and Freddie Mac guarantee fees or in Federal Housing Administration mortgage insurance premiums either.

However, some of the uncertainty regarding repurchase risk involving the government-sponsored enterprises is dissipating. "I think we are starting to see that clear up. People know more of what to expect. That is a good thing. It impacts how we are reserving for loan losses. It impacts what we do in credit overlays to protect ourselves," Cowen said.

In addition, the Federal Housing Finance Agency has proposed new affordable housing goals for the GSEs. "I think that is encouraging. We got to help first-time homebuyers," he added.

Cowen also noted that FHA has proposed changes to its lender compare ratio, which penalizes lenders with higher default rates than their peers. In today's environment, it also discourages lenders from serving traditional FHA borrowers with low credit scores. FHA wants to change that so lenders will reach out and serve more borrowers with lower credit scores. "I think the lending community is waiting to see what happens there."

Despite some encouraging signs, Cowen stressed that it remains a "very tough origination market" even though margins have stabilized.

He expects third-quarter loan production will be good because buyers were still looking to purchase a home. But the fourth quarter and the following winter months will be tougher. "It will be challenging for lenders and for loan officers who depend on commissions," the group leader said.

Cowen joined the Oklahoma banking company in December 2008 after working as the national sales leader for LendingTree. He previously was a senior vice president at Wachovia and before that at Bank of America.

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