Ed Furash, chairman of Furash & Co., a Washington-based consulting firm, says commercial banks are rushing to acquire mortgage bankers so they can build the cornerstone of a "unique relationship" with the consumer.

But he warns that there are pitfalls, including increased regulatory scrutiny and possible competition in originations from Fannie Mae and Freddie Mac. The American Banker talked to him recently about the latest trends.

Q.: Why are so many banks acquiring mortgage companies these days?

FURASH: There are multiple reasons that have all come to a head concurrently.

First, most banks have recognized that the mortgage is a core consumer financial-service product around which they can sell many other products.

So increasingly there is a desire to get at this core borrowing in order to establish a relationship with the consumer.

By and large, the mortgage banks are the ones that took over the origination business from the S&Ls, and so that's where the big origination streams are for the future.

Second, the mortgage business has enormous value for the continuing income stream from servicing. The best way to create servicing is to do your own originations.

Q.: Tell me more about crossselling.

FURASH: What happens is that the moment a person refinances or buys a new home, two other events get triggered.

One, you get a picture of the entire creditworthiness of the customer. So you can sell the second mortgage, a credit card, expand their limits, and redo their credit.

Second, the acquisition of a new home triggers new spending: furniture, refrigerators, and the like, much of which has to be financed.

A house is also the most important investment people typically make. It ties into how people think about planning their retirement and their future. And the most rapidly growing part of the consumer business is the management of people's investments.

Q.: What are the pitfalls?

FURASH: The first is this is a sales and merchandising business. That has good news and bad news in it. The good news is that if its done well and done ethically, you can make a lot of money. The bad news is that you can often get tripped up and be accused of practices that don't quite fit the image of a bank.

Q.: Give me an example.

FURASH: Where you use incentives based on the amount of extra fees people can get, or overage on the loan rate. People can get you into a devil of trouble doing that.

Q.: Are there others?

FURASH: The second pitfall is that this is becoming a high-tech business. That's going to require major investments in technology.

The third dangerous element is to know how to manage your growth.

The next is risk related to capital exposure. The risk that could come from having so much in the pipeline that you could mishedge, mismanage, gamble, and therefore, the controls have to be more strict.

Another danger is operating failure. We've had a lot of problems where consumers have had their mortgages sold two and three times, and don't know where to send their money. Or they see mistakes in escrow or taxes. This is a hot consumerist issue.

Finally, many of the small mortgage banking companies have been able to escape the Community Reinvestment Act standards. As the industry consolidates, there will be more pressure on them for CRA participation.

Q.: Do you see any change in the role of Fannie Mae and Freddie Mac as banks become bigger players?

FURASH: Well, I think the question becomes whether the agencies will open up into direct competition with the mortgage banks by having their own direct origination.

The banks' franchise would be of less value. The banks may turn out to be at a price disadvantage in the market. The cream could be skimmed off the business.

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