Chemical Banking Corp., like many commercial banks, has been bitten by the mortgage bug. That became very clear last week when the New York giant announced plans to buy Margaretten Financial Corp., one of the nation's largest mortgage banks, for about $372 million.
Thomas Jacob, Chemical Bank's executive vice president in charge of its national consumer business group, played a key role in the decision to buy Margaretten and will oversee the integration of its mortgage operations with Chemical's.
Mr. Jacob spoke about the acquisition and the broader push by banks into mortgage banking.
Q.: Why did Chemical want to buy Margaretten?
JACOB: What we have been lacking is a certain balance in our originations network. We are primarily a wholesale and correspondent lender. What retail originations we have had are in New York, New Jersey, and Texas.
We have been looking for a long time for a partner with a significant retail originations network. Margaretten seemed like just the right strategic fit.
Q.: After the merger, will Margaretten operate under the Chemical Bank name?
JACOB: The business of Margaretten and Chemical will be combined into a single business. That is not to say that it will be a single legal entity. For a variety of reasons, it will be multiple legal entities. But it will be a single business. We will be integrating the two businesses on the originations side as well as servicing and technology. The Margaretten name will remain on the retail side.
Pending some confirmation from market research, we are most likely to use the name Margaretten Division. Wholesale lending will be Chemical.
Q.: What's the big attraction of the mortgage business?
JACOB: Mortgages is a very important piece of retail financial services - by virtue of its size, by virtue of the fact that [a mortgage] is a core consumer financial need, and by virtue of the fact that homeowners make very attractive customers.
It is also a very attractive feebased business and commercial banks are trying their best to reduce their reliance on net interest income.
The third reason iS the degree of fragmentation that exists in the mortgage business. We want to participate in the consolidation phase in order to take advantage of the relative economies of scale that accrue to the larger players.
Finally, I might add that the mortgage business plays to the traditional strengths of commercial banks - risk management and funding, things where mortgage bankers are disadvantaged.
Q.: Mortgage banking operations often report volatile earnings. Does that bother you at all?
JACOB: This business has its share of risk. Unlike a typical mortgage banker, we have a loan portfolio which, if funded and risk-managed properly, can throw off consistent earnings. If you have a good balance of originations and servicing, the risks in one can offset the other. Last year, people saw a lot of runoff in their servicing portfolios, but there was tremendous value produced in the servicing portfolio.
This year you see the reverse phenomenon to some extent, as originations weaken and you do not see the kind of fees you did last year. [But] the servicing portfolio is producing a consistent stream of earnings.
Q.: So Chemical is in better shape than others to get steady earnings from mortgage banking?
JACOB: We have been in this business since 1988 and we have consistently made money. Last year, when everybody was taking writedowns, you did not see us doing that.
If you are a balanced bank, and you have balance of originations and servicing and you function as both a mortgage banker as well as a commercial bank portfolio lender, I believe you can show consistent earnings regardless of the volatility that is typical of this business.
Q.: Will there be any cultural problems in melding an independent mortgage bank into a commercial banking giant? Origination employees of mortgage banks are often more entrepreneurial than the staffs of commercial banks, so won't there be some issues of compensation and control?
JACOB: In our due diligence - as you know we have conducted similar due diligences in many other companies in the past - we found that Margaretten's originations practices were relatively compatible with our own. And considering the fact that we do not have a significant retail originations function, we won't have the kind of clashes that some people might anticipate.
Q.: And compensation?
JACOB: I don't anticipate any changes at this stage.
Q.: Are you concerned that, with mortgage demand falling, you might have to cut back the Margaretten originations network?
JACOB: I don't really see that. The purpose of buying the originations network was to beef up our retail network. To the extent that some adjustment in that network is Called for to keep it in line with the size of the market, that will be done.
But I do not really see that a sizable contraction is needed. On the contrary, this particular environment is conducive to mortgage for home purchases. That's what the retail distribution network is most adept at. Though you see the overall market contract, primarily because of the loss of refinancing volume, the purchase market volume should see an expansion. That is what our forecast says and it would be ideal for a retail operation.