Though many community banking companies are expanding in mortgages, the start-up First Texas BHC Inc. is going further than most by offering second liens on million-dollar homes.
The $653.4 million-asset parent of Southwest Bank in Fort Worth sells most of its mortgage production to Fannie Mae and Freddie Mac. But last year it budgeted $40 million for a program in which borrowers get a first mortgage for $417,000 (the biggest loan eligible to be sold to the government-sponsored enterprises) and a second mortgage for $300,000 to $400,000.
The first mortgage is sold to Fannie. The second stays on the bank's books, since there is no longer a secondary market for the riskier mortgage types that flourished a few years ago. Marshall Boyd, the president of Southwest's mortgage division, said the second liens are written to stricter underwriting guidelines than those of the GSEs.
"We certainly understand how other banks would be scared to death to originate loans they couldn't sell," said Boyd, who sold his company, BMC Mortgage Services Inc., to Southwest last year. "Right now we feel comfortable with these products, and we think there's a big role in the future for regional banks that understand their local markets."
The second lien program has a maximum combined loan-to-value ratio of 50%. Borrowers also must provide full tax returns and job histories and maintain higher reserves than the GSEs demand, Boyd said.
Because so many mortgage originators have gone out of business, Southwest is "cherry-picking" the most creditworthy borrowers, many of whom are looking for better pricing than is being offered by large banks, particularly for jumbo loans, he said.
Vernon Bryant, the chairman and chief executive of the bank and its holding company, said he sees mortgages as the ideal hook for wealthy people who can be cross-sold other products and services.
"We get a lot of banking business off mortgage loans," he said. "When we have a business owner who is buying a new house or wants to refinance, that's just one more way we tie the owner to our bank. So at first you get one or two mortgages, and eventually it's 1,000, and they add up."
Last year Southwest nearly doubled its total loan portfolio, to $421 million, including a $115 million portfolio of residential loans.
Bryant said he is comfortable with the loans being put on the balance sheet because the Dallas-Fort Worth housing market has held up far better than those of other major cities. Prices in the area "never did get overinflated," he said.
The Standard & Poor's/Case-Shiller Home Price Indices say home prices in the Dallas area have fallen 10.8% from their peak in June 2007 through this January, compared to the 29.1% drop in a composite index of 20 cities nationwide.
First Texas BHC also is flush with cash and looking for the best ways to deploy it.
Bryant raised $93 million when he started First BHC in 2007 and another $11 million in last year's fourth quarter. He said he expects the bank to grow to $1.5 billion of assets in five years.
At that point, First Texas BHC "may go public so investors who want to cash out can sell," he said. But he has no intention now of selling.
Southwest got $13.5 million from the Treasury's Capital Purchase Program. Though many bankers have said accepting Tarp money now carries a stigma, Bryant called the government funding "insurance for bad times."
"We felt that you can't have too much capital," he said. "There are opportunities to grow."
Bryant and Boyd have long track records in Fort Worth and are former rivals.
Bryant was the CEO of the $1.8 billion-asset TexasBank when it was sold in 2006 to Compass Bancshares Inc. for $464 million.
After he started First Texas BHC, it bought two community banks, the $53 million-asset Community Bank of Texas and Southwest Bank, which then had $300 million of assets, and merged them. BMC Mortgage, which originated $140 million of loans in 2007, was the company's third and most recent acquisition.
BMC Mortgage was TexasBank's "toughest competitor," Bryant said, and he wanted to align his start-up with a mortgage company that had established relationships with local real estate agents.
In turn, by selling itself to a depository, BMC escaped a liquidity crunch that is bedeviling nonbank mortgage lenders as warehouse lines dry up.
"There is no question that the main origination channels of mortgage products for the next few years will be depositories and well-run net branches," said Dennis Schwartz, the founder of Schwartz & Associates, a law firm in McKinney, Texas, that specializes in residential loan document preparation. (Net branches are semi-independent loan offices that get back-office support from a central site.) Mortgage bankers now "are constantly in search of warehouse lines" and "are looking to merge or purchase depositories … as the safest way to stay alive," Schwartz said.
Southwest also touts an ability to close mortgages on time as an advantage over big lenders that are flooded with volume.
"Since I have to see our customers at the grocery store and at my kid's soccer game, I'm not going to miss a close," Boyd said.