Provident Bancshares plan to close its mortgage unit by yearend illustrates the difficulty lenders have had in turning a profit during the last 18 months, as well as the industrys dreadful state.
Citing the cyclical and low-margin nature of the business, Provident officials said Wednesday that the unit could not produce revenue growth in line with its other, more profitable operations, leading to the decision to close it. The company will continue to offer mortgages but through an outsourcing arrangement with another lender.
We got to the point where we felt we were extremely efficient, we did a great job processing and closing the mortgage, we had great customer satisfaction, and we still couldnt make money in it, said Jack Novak, group manager consumer lending at Provident Bank. We determined that this product is too costly, too cyclical, and too low-margin to be consistently profitable at levels that we want.
Business is bad, most observers and lenders agree. But Providents move, the cyclical nature of mortgages aside, begs the larger question of why any company would want to be in mortgages at all.
Neil Bader, chief executive officer of IPI Skyscraper in New York, one of the countrys largest mortgage brokers, said it seems as if nobody wants to be in the mortgage business anymore.
Besides narrowing margins, mortgage brokers, which originate more than 70% of loans, are indirectly biting into some lenders profits, Mr. Bader said.
Mortgage brokers have taken over the industry, he said. And brokers inherently churn their portfolio when rates go down a half a percent, the first thing I do is call my customer and refinance him.
This has resulted in a diminishing of servicing values, formerly the most profitable piece of mortgage banking, Mr. Bader said. Also, mortgage volume reached $1.4 trillion a year ago but will be lucky to break $1 trillion this year, he said.
The bottom line is that theres less business right now. Youve got more people fighting over the same deals, and inherently, that is going to make for a thinner margin and more competitive industry, he said.
Yet many banks still feel they must offer mortgages. Despite his sweeping comments about the business, Mr. Novak said mortgages are still an important item to offer retail customers.
Gerald Baker, president of First Horizon Home Loan Corp. of Dallas, the mortgage subsidiary of First Tennessee National Corp. of Memphis, said borrowers consider mortgages one of the most valuable products they can get from a bank.
Banks that can attract customers by offering mortgages can also sell them products such as checking accounts, savings accounts, or annuities, he said. If a bank lets a borrower go down the street to another bank, youre giving that bank an opportunity to cross-sell to your customer.
Michael McMahon, an analyst at Sandler ONeill & Partners, said banks have to offer mortgages. The question is, what is the best way to offer them, he said.
The biggest problem today is that many companies do not maintain a balance between production and servicing capacity, Mr. McMahon said. Many have far too much production, which is why they are losing money, he said.
Its a result of the incredible market in 1998, and companies have not fully downsized yet, he said. Although theyve been downsizing, its like a dog chasing its tail. They cut, but volume keeps falling.
Large lenders such as Wells Fargo & Co., Bank of America Corp., and Countrywide Credit Industries are generating decent, if not good, mortgage profits because their servicing portfolios are large in relation to their production capacity, Mr. McMahon said.
But if youve got that turned around, and youve got production capacity thats four times what youre servicing, youre in a world of hurt, he said. And theres a lot of guys out there like that.
Pat Flood, president and CEO of HomeBanc Mortgage Corp., an Atlanta originator, agreed that 1998, the last boom year in the mortgage business, has contributed to todays suffering.
Many banks overinvested in the refinancing boom that year and are only now reevaluating their strategies, Mr. Flood said. The boom created unrealistic expectations for the size of the industry, he said, and too many players joined in.
When the mortgage market collapsed last year, origination operations started to collapse with it, Mr. Flood said. If your strategy is heavily weighted in refis, youre already dead. If your strategy is against purchases and refis, youre dying a slow death.
The only originators left standing have focused exclusively on the purchase market, Mr. Flood said, but these companies are now feeling the repercussions as the refinancing lenders try to hold on to their business while losing money.
They are dropping prices to get loans, even if they lose money, he said. Its crippling margins in the business.
Mr. Bader said that todays production volume actually is the national markets normal level and that the industry should not expect a big increase soon.
This is the real market now, and there will be a lot of shakeout as a result of that, he said. Everybody can make money in a good market, just as in the stock market, but when you lose 30% of your volume nationwide, somebodys going to lose out.