Friday Flashback: When Mortgage Lenders <i>Wanted</i> a Central Regulator
Once you stop chuckling at the political incorrectness and retro-futurism of this 1959 speech, you sense the privacy dangers that lurk ahead for us in the present day.February 8
Mtge. Bankers Warned to Consider New Pricing in Face of Competition
February 13, 1979, Tuesday
By GORDON MATTHEWS
NEW YORK The nation's mortgage bankers are being asked to consider new ways of pricing their services in the face of inflationary pressures and potential competitive challenges from "sleeping giant" firms who could use their size to cut loan origination or servicing fees and change the shape of the industry.
The call came from Claude E. Pope, president of the Mortgage Bankers Association of America, who also emphasized in a speech last week that efforts at innovation are being hindered by nonstandardized regulations and declared: "The time has come to think about the possibility of a central regulatory agency for the mortgage banking industry."
His reference to sleeping giants on the horizon comes at a time when increasing interest in the mortgage and consumer finance areas is being shown by such firms as Sears, Roebuck & Co., the nation's largest retailer, and Merrill Lynch & Co., parent of the nation's largest securities firm, Merrill Lynch, Pierce, Fenner & Smith, Inc.
In a speech in Los Angeles to the MBA's national mortgage banking conference, Mr. Pope noted that "one nationwide retailing conglomerate has already developed a financial network that includes a savings and loan association, insurance operations, mortgage banking firm and private mortgage insurance company, as well as a nationwide chain of retail stores.
"It is not hard," he said, "to envision the extension of such activities regulators and legislators permitting to include the opening of mortgage origination operations throughout the country. The competitive implications of such a move are obvious."
In the loan-servicing realm, he pointed out, major credit card companies such as American Express, Visa or Master Charge could use economies of scale to "reduce servicing fees to such a degree that the mortgage banking business as we know it today would find it difficult to remain viable."
Mr. Pope is president and chief executive officer of Cameron-Brown Co., Raleigh, N.C., the mortgage banking affiliate of First Union Corp., holding company for the $1.7 billion-deposit First Union National Bank, Charlotte, N.C.
He asserted that the current system of pricing, stating servicing and origination fees as a percentage of the outstanding balance of a loan, threatens the continued profitability of the industry and tends to allocate mortgage credit away from lower-income groups.
The existing pricing structure is set largely by the Federal Housing Administration and government-related secondary mortgage market agencies. Mortgage bankers originate the bulk of all FHA-insured loans and are the largest participants in most programs of the Federal National Mortgage Association and the Government National Mortgage Association.
Linking fee income to outstanding balances means, he noted, that the revenues received for servicing fall each year as a loan ages, but servicing activities must remain essentially unchanged with their costs subject to inflationary increases.
This system, he said, "rewards the origination and servicing of large loans and establishes penalties for the origination and servicing of small loans." Since costs are a function of the number of loans, while revenues devolve from the outstanding balances, mortgage bankers prefer to deal with larger loans.
"Something must be done to revise the current standard pricing arrangements that guarantee the mortgage originator-servicer a loss on small loans, and loans that have amortized to small balances," the MBA president emphasized.
Current pricing arrangements set by government agencies 'discriminate against small loan balances and, therefore, against low income families," he said. To protect mortgage bankers' profitability and encourage expansion of mortgage credit to low-income families, "the existing pricing structure for origination and servicing must be revised to reflect the realities of the market place."
In Washington, a FNMA official said that the agency was "aware of industry concern" and was "researching ways to better handle small loans."
Mr. Pope suggested that origination revenues might better be set as a declining percentage based on the loan amount, such as a 2% fee on the first $25,000 and a 1% fee on amounts above that level. This concept represents a "full-cost approach," he said, and would "remove the incentive to deal only in the larger loan market."
Similarly, he said, the servicing price could be established as a graduated scale based on loan size. For example, the fee could be set at 0.25% on loan balances above $75,000, at 0.375% on balances between $30,000 and $75,000, and at 0.5% on balances below $30,000.
"We might even set a minimum dollar amount below which the servicing charge would not fall in order to reduce the possibility of servicing older loans at a loss," he suggested.
A major obstacle to innovation and the evolution of the industry, he asserted, is the range of regulations, varying from state to state and also by loan type, facing mortgage bankers. The alternative of a central regulator is a possibility that should be considered.
Mr. Pope acknowledged that "we could wind up with just one more layer of bureaucracy to account to, but said he also could conceive of a central regulatory body" that would successfully standardize and consolidate many of the rules, regulations and operating procedures with which we must comply.
"Such a regulator, with a mandate to foster the nation's housing goals through the maintenance of a sound and efficiently regulated mortgage banking industry, may be a welcome addition."
The MBA currently has a task force studying the question of industry regulation. The chairman of the 15-member group is Kennon V. Rothchild, a past president of the trade association and the chairman and chief executive officer of H. & Val J. Rothschild, Inc., St. Paul, Minn.
Mr. Rothchild said the group's work is still is the conceptual stages. The mortgage banking industry, he noted, "has always cherished its independence and clearly is not very interested in giving this up," but now wants to at least study whether some benefits might result from a more centralized regulatory relationship.