For Some Community Banks, QM Stands for Quitting Mortgages
Community banks sustained a 27% decline in mortgage banking income last quarter, confirming the laments of individual banks during earnings season. Some banks are getting creative to try to revive their business in coming quarters, but it will be tough.November 5
Pacific Mercantile Bancorp (PMBC) in Costa Mesa, Calif., is getting out of the mortgage business to focus on business banking.December 12
Community banks are being forced to rethink their mortgage strategy as regulatory change and ongoing commoditization redefines the business.
Several small banks have disclosed plans to downsize or shut down their mortgage operations, which shows that many management teams are taking a hard look at their product offerings and efficiency.
"This is the most difficult time to be in banking," says David Powell, president of bank consulting firm Vitex. "Challenges are coming from every angle. You have to decide what kind of bank you want to be and who you want to serve."
Banks exiting mortgages is a symptom of a broader trend, says Steven Reider, president of Bancography. Executives must focus on their most-profitable businesses, which requires an evaluation of everything ranging from mortgage and indirect lending to wealth management and middle-market lending.
"Banks have so little room for error," Reider says. "We are seeing renewed across-the-board strategic planning. Banks are focusing on whatever areas they have the expertise or pricing ability to acquire a strong market share."
Pacific Mercantile Bancorp (PMBC) in Costa Mesa, Calif., said in December that its bank would stop making mortgages. The $917 million-asset company decided that it was "primarily a commercial bank and the consumer mortgage business wasn't central to that strategy," says Robert Sjogren, Pacific Mercantile's general counsel.
The company, which left the wholesale mortgage business in 2012, does a routine "deep dive" into all operations to determine its strategic direction, Sjogren says.
The highly cyclical mortgage business also requires a lot of employees, Sjogren says. At the time of Pacific Mercantile's December announcement, about 100 of its 250 employees were focused on mortgages, he says.
Increased regulation is likely the top reason banks give for considering exiting the mortgage business, says L. T. "Tom" Hall, president of Resurgent Performance. Implementing the Consumer Financial Protection Bureau's qualified-mortgage rule has caused considerable anxiety among bankers.
Surveys in recent years show that about a tenth of bankers believe that compliance burdens outweigh the mortgage volume they generate, says Ron Haynie, senior vice president of mortgage finance policy at the Independent Community Bankers of America.
"We've gotten into a climate where regulators are being extremely thorough," Haynie says. "There's a fear of we don't want to make a mistake. We don't want to have a problem with an examiner."
Regulation reportedly prompted Bay Cities Bank, a Tampa, Fla., unit of Florida Business BancGroup, to announce plans to stop originating mortgages on Jan. 31. Gregory Bryant, the $489 million-asset bank's president and CEO, did not return a call seeking comment.
"I can understand why banks that don't have much scale in this business and don't expect to gain much more would get out," Hall says. "But I think some banks have bailed out too soon. They are just looking at QM and saying enough is enough."
Still, mortgages are largely viewed as a fundamental banking product, so most small banks are likely to stay in the business, industry experts say. In a sampling of about 400 banks, only a few recently stopped doing mortgages, says Mike Lubansky, director of consulting services at Sageworks. Most of those that exited were former thrifts that decided to boost commercial lending, he says.
"Mortgages are such a key ... product for many banks that they can't just walk away from" it, Lubansky says. "You've got to become more efficient or look for alternative arrangements."
Instead, executives could buy software to reduce the need for paper documents, which are less efficient and require more checking and personnel, Powell says. Banks looking to quit making mortgages should also consider developing third-party relationships or referrals to nonbank lenders, Reider says.
ViewPoint Financial Group (VPFG) in Plano, Texas, sold its home-lending unit to Highlands Residential Mortgage in 2012. The $3.4 billion-asset ViewPoint said at the time that it would work with Highlands to offer mortgages to its customers. ViewPoint declined to comment, citing its pending purchase of LegacyTexas Group in Plano. The $1.7 billion-asset LegacyTexas still offers mortgages.
It might even make sense for larger community banks to enter the mortgage business, or expand existing operations, possibly by buying a mortgage lender, says Jeffrey Levine, managing director in the financial institutions group at Houlihan Lokey. But banks must remember that "mortgage origination is a people business" so any acquisition must fit its culture.
"It's a great time for a well-capitalized super-community or regional bank to look at fee businesses such as mortgages, asset-based lending or insurance," Levine says. "These deals are usually financially accretive and there is never a shortage of potential sellers."
First Partners Bank in Vestavia Hills, Ala., began originating mortgages because it was referring too many customers to others, says Elam Holley Jr., the $170 million-asset bank's president and CEO. When the bank opened in October 2007 it decided to forgo mortgages because there were signs of a real estate bubble, he says.
About two years ago, First Partners began considering mortgages but it needed to have the right people in place. The bank was finally able to find the right personnel, just as home values began to rebound around Birmingham, Ala. Since the bank is developing its unit, it is able to keep costs down, Holley says.
"We look at everything from loan products to deposit products annually," Holley says. "We needed this product. . . . We want to serve our customers in all of their financial and banking needs."