With the burden of increased regulation and the resulting increase in origination costs and other operating risks, some community banks are finding they are no longer able to have a viable, profitable mortgage banking business.
Yet, these banks still want to be able to offer their customers mortgage products while at the same time not lose the relationship to a competitor. One emerging solution to this dilemma is to outsource mortgage origination functions to another lender.
If smaller banks and credit unions tell their customers to go elsewhere for a mortgage, they could see them take their deposit relationships to another institution, said Dennis Hardiman, the CEO of Newport, R.I.-based Embrace Home Loans.
Among the selling points that independent mortgage bankers use to attract credit unions and community banks to use their services on a private-label basis is that they cannot poach the financial institution's customers. Numerous community banks have turned to this model, with providers like PHH Mortgage offering these services for some time.
But the cost and regulatory compliance burden has made turning the mortgage function over to another party more urgent. There is also regulatory potential liability, "which is extremely painful for them because they always want to maintain good working relationships with their regulators lest they start to have more restrictions put upon them," said Hardiman.
BOK Financial Corp., the holding company for a superregional bank headquartered in Tulsa, Okla., makes that same no-poach guarantee to the financial institutions it purchases whole loans from through its correspondent channel. The pledge is in the legal agreements it has with its whole loan sellers.
Slowly but surely, the company is moving in the direction of providing mortgage origination services on an outsourced basis for financial institutions, explained Robert Ross, the senior vice president and channel leader of correspondent mortgage services. The correspondent unit operates under the name FirstLand Mortgage Servicing.
The name, one that is not tied to any other BOK unit, along with the pledge, helps to ease the fear that many smaller financial institutions have of selling their mortgage production to a larger bank, he said.
BOK has been active in the correspondent channel for approximately nearly four years. It created the business with the eventual goal of offering private-label mortgage services. Ross said his original title when he joined BOK to start the unit was vice president of correspondent and private-label lending.
It already provides underwriting services for its customers as part of its correspondent program. The next step is to buy loans on a table-funded or wholesale basis from banks and credit unions. These loans would close in FirstLand's name, with the client taking the application and processing it, and BOK handling the remaining functions, underwriting through funding.
After that, the next move in this progression is to offer private-label mortgage originations, which he described as a longer-term opportunity for BOK.
The regulatory burden being placed on these institutions is one reason why they are considering outsourcing the function to a company such as BOK. "They're not going to maintain full-time origination stuff but they still have a need to accommodate their borrowers, their clients and they may want to offer mortgage services but not necessarily have the compliance or investor risk that goes along with that, Ross said.
The Dodd-Frank Act has increased the regulatory burden and costs on those smaller institutions, he added. That burden, including the additional staff needed for compliance is what is causing the smaller institutions to reassess their place in the mortgage business.
But another reason that banks and credit unions are looking for other mortgage options is the current state of the originations business, Ross said. These smaller banks and credit unions, like many other mortgage originators, got much of their recent mortgage business from refinance customers.
To be able to successful compete in the mortgage business, the originator needs to have size and scale. Larger companies are able to counterbalance the additional costs Dodd-Frank and the associated regulations have brought on, he said.
The wholesale program, which is scheduled to be available late in the second quarter or early in the third quarter of 2015, is designed to meet the needs of those institutions that want to still offer mortgages to their depositors but the costs and lack of scale make it unpalatable to close in their own name and sell the loan.
The move by community banks and credit unions to outsource service providers like BOK and Embrace should "accelerate as we continue to see the mortgage market normalize and become more dependent on purchase business," Ross said.
Embrace's latest client is Commerce Bank, in Worcester, Mass. The private-label operation will offer consumers conventional, FHA, VA and USDA mortgage products under the name Commerce Bank Mortgage Solutions.
Embrace offers processing services to banks looking to outsource part of the function. "We see that as a good business to be in, independent of whether or not there is any opportunity (regarding) acquisition of the loan," Hardiman said. With this model, they would maintain their own staff of loan officers who take applications and manage the origination process.
But the other option Embrace offers is a co-branded mortgage program with the bank "that offloads all of the compliance responsibility associated with mortgage origination. We'll originate the loan. If it is a portfolio loan, we will return to the bank. If it is a secondary market loan, we will just retain it and manage the transaction ourselves and likely retain the servicing," he said.
A properly run affinity mortgage lending program helps the bank to build customer loyalty. Embrace looks to support the bank's brand in the process.
But because it is co-branded with the bank, Embrace's role is not invisible to the consumer, unlike most outsourced mortgage relationships, Hardiman added.