A fledgling cooperative whose organizers say will help smaller mortgage lenders stay competitive amid ongoing consolidation has enrolled 14 members including banks, mortgage bankers, mortgage brokers, and independent real estate companies.
USALoan Network LLC, a two-year-old outfit based in Windermere, Fla., started the cooperative in January. It aims to sign up small and midsize mortgage lenders nationwide by persuading them that if they are to survive they have to pool their resources.
Some observers, however, are skeptical about the ability of such a venture to dent the top 10 originators, which had a quarter of the home loan market five years ago and today control upward of 50%.
But Jerry Elliott, an executive vice president at USALoan, said: "We aggregate all the lenders in our network and create size. And it is from size alone that you are able to negotiate more favorable terms."
Mike McMahon, a managing director with Sandler O'Neill & Partners LP, in New York, said that though cooperatives can help lenders' profit margins by allowing them to cut costs, simply banding together cannot overcome all the challenges these smaller companies face.
USALoan's current members have annual origination volumes above $300 million but below $2 billion. Lenders join by purchasing a license from USALoan to participate in the network. The first lender to buy a license in a state becomes the primary licensee for that state, and others from that state must buy sublicenses from the primary licensee.
They get "many of the benefits of a large corporation without being owned by a large corporation," Mr. Elliot said.
These include lower Fannie Mae and Freddie Mac loan guarantee fees; health insurance packages for member firms' employees; the growing collective-bargaining power of the cooperative; and shared branding such as USALoan.com, which directs customers to individual members' Web sites.
Dexma Inc., a software company that developed the Web versions of Fannie Mae's Desktop Originator and Desktop Underwriter systems, expects to complete an online origination platform for USALoan by the fall, Mr. Elliott said.
Doug Clark, the chairman and chief executive of Homeowners Mortgage Enterprises Inc. in Columbia, S.C., said the Dexma project is crucial, because "the digital divide is go great" between the big and small players.
"With that platform, members can have the same technology as the large players," Mr. Clark said. "We couldn't afford to develop it individually, but we can afford it as a group."
Executives from companies in the network said small banks have to collaborate this way to compete with such giants as Washington Mutual Inc., Chase Manhattan Mortgage, and Wells Fargo Home Mortgage. Last year that trio originated more than half a trillion dollars of mortgage loans.
"Everybody seems to pay attention to somebody that has big numbers," said Paul J. Salvo, the president of Jackson, Miss.-based Cimarron Mortgage Co., that state's primary USALoan licensee. "The more we can show big numbers by being cooperative, the more attention we get," he said. As network members, we "control our own destiny."
Mark Scott, vice president for marketing at Atlanta-based HomeBanc Mortgage Corp., which spun off from First Horizon two years ago, said small mortgage lenders will get "substantial and meaningful" cost savings through participation in USALoan Network. This is crucial in a business where profit margins are "typically pretty thin," he said. Homebank is not a member of the network.
When HomeBanc left First Horizon two years ago, Mr. Scott said, it experienced "sticker shock" tied to health insurance policies. "There was definitely a price advantage to being under First Horizon's policies, which covered thousands of employees, to going and getting coverage for the 500 or 600 people," he said.
But, Mr. Scott said, a cooperative is "not the easiest thing" to manage. "At some point I would imagine competitive issues among members of the cooperative operating in the same states or cities could prove problematic."
Cimarron Mortgage's Mr. Salvo said that because primary state licensees control the sale of the sublicenses within their states, network members "are more partners than we are competitors." It is similar to the franchise relationships among real estate chains like Century 21 and REMAX, he said.
Dave Stevens, senior vice president for single-family lending at Freddie Mac, said cooperatives "can be useful in providing groups of smaller lenders with a critical mass for greater opportunities."
Mr. Stevens noted that Freddie recently started a strategic alliance with America's Community Bankers to provide ACB members "greater value and opportunity."
"We work with lenders of all sizes to bring the benefits of the secondary market to as broad a spectrum of home financing as possible," he said, "and we're always interested in speaking with organizations to explore areas of mutual benefit and value."
Mr. McMahon at Sandler O'Neill said that originating loans at low cost is only one factor for success in mortgage banking. Firms also have to sell their loans at the best possible price to investors.
"The biggest expense component in mortgage banking is personnel," Mr. McMahon said. Referring to USALoan's insurance perk, he said, "Arguably, health care is an important part of personnel expense, but there has got to be something more to this for it to be a success."
Moreover, it is not easy to pool resources for leverage in the secondary market, Mr. McMahon said, citing complex legal issues involved in guarantee fee and seller/servicer arrangements.
"There is a reason why huge companies buy others, or merge, to become bigger themselves, so that there is one legal entity that has some muscle behind it," he said.
