Amid concerns about the added complexity of the TILA-Respa integrated disclosures and growing demand for purchase loans, Flagstar Bancorp plans to reduce its over-reliance on third-party originations by expanding its retail mortgage business.
A mere $300 million of the Troy, Mich., bank's $5.8 billion in single-family mortgages were originated in the retail channel during the fourth quarter. And concerns about TRID compliance caused Flagstar to be more selective in the loans it purchased from correspondents and brokers during the fourth quarter, which contributed to a 13% drop in third-party originations from the year-earlier quarter and a 27% decline from the previous quarter.
"Given the fact that third-party originations account for 95% of our loan production, we felt the effect of TRID more than other bank originators," Flagstar CEO Alessandro DiNello said during a Jan. 26 earnings conference call.
Under the TRID requirements that went into effect in October, said Flagstar Chief Operating Officer Lee Smith, "we adopted a thoughtful and careful approach by taking greater control in creating and delivering the disclosure documents, which caused a more pronounced impact in third-party loan applications and originations, particularly in the broker channel."
Flagstar laid off staff throughout its banking operations in late 2013 and early 2014. But now it's working to expand its retail mortgage capabilities.
"We are now beginning to see the fruits of many discussions we have had since Len [Israel] arrived at Flagstar, as evidenced by the addition of over 50 successful retail lenders from around the country to our retail staff already this year," DiNello said. "And we have a full pipeline of others that we will be bringing aboard going forward. This will be a continuing focus throughout 2016."
In addition to reducing its reliance on third-party originators, Flagstar is making the expanded retail push due to expectations that borrowers will be buying more homes in the coming years than refinancing their existing loans.
"We see the purchase money market continuing to get stronger and we think adding this horsepower in retail lending is the best way for us to take advantage of that environment," DiNello said.
Flagstar noted in its quarterly earnings presentation notes that the expanded retail business will augment its third-party originations, not replace it. The renewed focus on retail originations follows moves by BankUnited and Walter Investment's Ditech to exit the retail channel.
Flagstar also wants to open a new channel to provide financing for homebuilders. "We have brought a seasoned team of builder finance lenders on board who specialize in lending to homebuilders," Smith said. "This is a national platform and we believe it will also lead to significant positive synergies with our mortgage origination business."
Flagstar reported net income of $33 million for the fourth quarter of 2015, up from $11 million a year ago, but down from $47 million in the previous quarter. In addition to the TRID concerns, Flagstar said the quarterly drop in earnings was attributed to a decrease in gain-on-sale margins, which made its loans less profitable.
Flagstar originated $1.4 billion in mortgages from brokers and $4.1 billion from correspondents during the fourth quarter. Flagstar works with approximately 700 correspondent lenders and 500 mortgage brokers.
The Michigan bank had some pretty rough years following the housing and financial crisis, including settlements with mortgage investors a regulatory fine in 2014 over allegations of noncompliance with servicing regulations. However, during 2015 it sold over $1 billion in nonperforming loans and risky assets. "Our balance sheet de-risking program is now complete," Smith said, and it has "led to significant cost savings in terms of lower asset resolution and FDIC expenses."
The bank is also investing in the mortgages it originates. In 2015, "we added $2 billion in high-quality jumbo and agency loans from our own originations as we look to build a solid held-for-investment portfolio that generates consistent interest income," Smith said.