Mortgage Bankers Tackle Shrinking Margins

HomeBridge Financial Services' survival strategy in today's origination market of shrinking margins and volumes is the old countercyclical hedge of building up its servicing portfolio.

To help reach its goal of $25 billion in mortgage servicing rights, the Iselin, N.J.-based company is building a servicing platform in Kennesaw, Ga., and the plan is to transfer subserviced loans to this location in March 2015, CEO Peter Norden told attendees at the Mortgage Bankers Association's Annual Convention on Tuesday.

The strategy is one of several HomeBridge and other lenders shared at the show about how they are coping with today's market environment and planning for the future.

The biggest challenge facing the company — which originates loans through a retail branch network, two wholesale platforms and an aggregation operation — is in compliance. The company has 20 people in its compliance unit, and is spending $7.5 million annually on a function that does not generate any revenue, Norden pointed out.

While its retail unit has seen margins increase by six basis points this year compared with last, HomeBridge's wholesale business margins have dramatically dropped. Its correspondent business exists to generate servicing rights and is not profitable, he said.

All companies are dealing with lower origination margins; MBA's data show in the first quarter originators created loans at a financial loss. Now, with volumes well below those of 2013, some originators are out to underprice the competition. "Some of my competitors decided they would make (the lower revenue) up with more volume," Norden commented.

Capital is a problem for many in the industry. HomeBridge recently enhanced its own position by adding a private equity investor.

On the retail side, HomeBridge keeps its salaries relatively low (every employee including Norden has a base salary of $200,000 or lower) with the bulk of compensation coming from bonuses.

By being incentive driven, the company does not have to dial back employee compensation when markets tumble.

Its retail branches do not have leases longer than three years; the company tries to include a 12- or 18-month buyout clause in the lease so if there is an underperforming branch it can be shut, Norden said.

Another way HomeBridge manages costs is to freeze new hiring in the fourth quarter (with the possible exception of sales people). This is because the first quarter of the year typically has the lowest origination volume and the aim is to limit lay-offs, Norden said.

Crescent Mortgage Co., headquartered in Atlanta, only operates in the third-party channels and its president, Fowler Williams, echoed much of what Norden had to say when it comes to compliance.

As a third-party originator, his firm needs to ensure the other companies it buys loans from are in compliance themselves.

"We are a compliance company that tries to make some loans in our off time," Williams commented half-jokingly. Compliance is a part of practically all of its employees' job descriptions.

Still Crescent has been profitable every month this year because it doesn't price "stupidly," he said.

There are three pillars behind its origination strategy, Williams said. The first is safety and soundness, followed by profitability, and then growth.

Crescent places the greatest emphasis on the safety and soundness pillar, Williams said, adding that without that, the other pillars are not important.

Steven Klein, the director of institutional lending at Reverse Mortgage Solutions Inc., a Houston-based subsidiary of Walter Investment Management, said the product his company specializes in offers an option to increase margins.

RMS' lead product is the Home Equity Conversion Mortgage for purchase. There are many in the mortgage industry that were not aware that a reverse mortgage could be used to finance a home purchase, he said he has found.

He also framed this as a loan officer hiring and retention issue, declaring that companies have lost out on sales people because they did not have this product option.

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Originations Secondary markets Compliance Servicing
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