When Jack Conway started lending to home buyers in Massachusetts 18 years ago, his money was in heavy demand. Banks were under the gun. They basically had no money to lend.
How times have changed. Early last month, pummeled by the state's largest banks, Mr. Conway sold his Northern Mortgage Co., the lending operation he started in 1976. The move was a signal to the dwindling number of independent mortgage bankers that their days may be numbered.
"Our time had come and now it's gone," says Mr. Conway, who owns Jack Conway & Co. of Norwell, Mass., the fourthlargest real estate company in the state. "The spread has tightened so much, we just could not compete against the power of the larger banks."
Northern was bought by Mellon Mortgage Co. of Houston, a subsidiary of Pittsburgh's Mellon Bank, in a deal reportedly worth just under $2 million. Mellon is building a presence in New England and says it can make money on Northern' s portfolio.
"The large you are the more you can absorb the cost of originating and 'servicing loans,"' says Peter Milewski, vice president and regional production manager of Mellon Mortgage. "The cost of servicing our $27 billion mortgage portfolio is about a third of what it cost Conway to service his $96 million portfolio," he says.
Although Mr. Conway says he kept costs to a minimum, he could not absorb losses he would have had to incur to compete with giants like Fleet Bank, BayBank, Shawmut, and Bank of Boston. He says the market changed drastically about six months ago, when these big players started to price loans so aggressively, he was literally squeezed out.
For years though, Mr. Conway enjoyed a distinct advantage. The real estate company grew with the booming economy of the mid- to late 1980s, and so did Northern. It went from originating $82 million in loans in 1989 to $136 million last year, making it the 38th largest mortgage banker in the state. It was the largest originator 'of Federal Housing Administration and Veterans Administration loans in Massachusetts in four of the last six years.
But the benefits that came with originating and servicing those loans started to disappear earlier this year. Banks started coming back into the mortgage market with a frenzy, says Mr. Conway, attracted by both the spread and the fee mcome they could generate. "Baybank and Shawmut were coming out with a 6.99% product;' he says, "when all we could do was 7.5%."
Mr. Conway says he was limited by what he had to pay for his own $1-5 million credit line at CoreStates Bank of Philadelphia, which was prime plus 75 basis points. "There was no room there to make money," he says. Customers, meanwhile, crossed the street to the competition. Mr. Conway says if he had stuck with the business, Northern would have generated half of the business it had last year, or less than $70 million.
"I thought we were going to have fairly good year," says the 70-year-old real estate man, who once was a boxing reporter for a Boston newspaper. "I guessed wrong. I didn't reckon we'd have such strong competition."
Mr. Conway was forced to fire some 12 employees earlier this year for Northern to stay profitable. But Mr. Conway says by the time Mellon came calling he realized there was nowhere to go but down.
"I didn't see the banks getting any poorer;' he says. "And I didn't want to start accumulating losses."
Mr. Conway says he had five other often after word leaked that he was willing to sell, including two from large New England institutions. But Mellon agreed to take on 44 of his 54 employees, which convinced him it was time to sell.
As for Mellon, Milewski says the value in the Northem portfolio sits in the servicing fees, which over time will make up for the temporary losses on the loans it originates in today's competitive climate. "We can afford to take those losses as a cost of acquiring an asset that will realize several times its cost over its life," he says. "A company like Conway does not have that luxury."
It's one reason why the New England mortgage market is slowly splintering, he adds, into a market controlled by the largest banks and the smallest mortgage brokers. The brokers don't have the servicing fees, but their overhead is tiny compared to the mortgage bankers.
Mr. Conway has come full circle. In 1976 he started as a mortgage broker. This fall, from the corporate shell that' s Northern, he is launching Jack Conway Mortgage Inc., a broker that will originate loans for 12 to 20 banks. "We'll keep it simple," he says.
Ms. Temes is a freelance writer based in Marblehead, Mass.
