Banking & Finance  January 19, 2007

Banks rethinking in-house mortgage departments

What goes up must come down.

While consumers cross their fingers and wait for the adage to hold true, folks in the mortgage industry have had to react fast to higher rates and the resulting stall in business. For some area banks whose mortgage divisions grew and boomed when times were strong, the reaction has been to get out of the game altogether.

Centennial Bank of the West, with 15 Northern Colorado branches, eliminated its mortgage division last year. “Our mortgage department was closed due to the slowdown in the mortgage business,” Paul Taylor, executive vice president and chief financial officer of Centennial Bank Holdings Inc. in Denver, said via e-mail.

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Union Colony Bank in Greeley got out of the business too. Union Colony president Larry Wood said the arrangement with an outside mortgage company is a long-term opportunity to eliminate the overhead that comes with a mortgage division while still providing mortgage services to the bank’s customers, rather than a temporary fix to a temporarily stalled market.

“I don’t know how unique this is, but it is something I think more and more banks are going to be looking at,” Wood said. “The compliance aspect (of the mortgage business) is very tough, and the philosophies of banks versus mortgage companies are not in line. Incentives and commissions are not the way banks work. Mortgage companies have to respond rapidly to an increase or decrease in interest rates.”

For three years, Tom Beck led the mortgage origination team at Union Colony Bank. When he left to start his own mortgage company in 2002, Union Colony no longer had an in-house mortgage division. A corporate affiliate supplied its mortgage services until this summer. That’s when Beck’s company – Lighthouse Lending LLC of Greeley – agreed to act as Union Colony’s independent mortgage broker, providing onsite mortgage loan services.

“When I left, it was solely for the opportunity to be a business owner and try my hand at that,” Beck said. “(Union Colony management and I) had a strong relationship, so over time as we stayed in contact, we saw it could be mutually beneficial to join forces. If you can get a good mortgage company, there’s a lot of business and potential clients a bank can end up networking with. Now you have more than a bank or a mortgage company going out and building business for itself. You have one of the largest and best from each field.”

Beck says quality mortgagers have to commit significant time, money and resources to each loan. Unless a bank can have staff that specialize 100 percent in mortgages, it’s going to be more beneficial for the bank to serve clients’ other needs and refer them to an outside mortgage professional.

The agreement Union Colony has with Lighthouse Lending is nothing more than a lease for office space in four bank branches. The bank is not responsible for compliance, overhead costs such as personnel, or finding investors to buy those loans.

“We’re not going to make profit from those loans, but we’re able to offer that service on site,” Wood said. “I think it’s mutually beneficial. If someone comes in looking for a construction loan to build a house, we can do that. If they want to refinance, we’ll send them to the mortgage company.”

Thus far, Wood said he thinks the arrangement has increased some traffic, but nothing as significant as the increase from putting post offices in branches.

Trend to be expected

Though she’s yet to see any statistics, Colorado Mortgage Lenders Association spokeswoman Lynn Bishop has heard of banks moving away from the mortgage business in recent months. She said the trend is to be expected.

“Generally, as business constricts, you’re going to have folks scale back,” she said. “It’s just response to demand.”

When rates were low, banks did well developing robust mortgage divisions. Now that rates are up – although they have been trending down, Bishop pointed out – it forces banks to react.

“It’s very cyclical,” she said.

Lonnie Ochsner, senior vice president of New West Bank in Greeley, said his bank plans to add a mortgage division in the future, but he’s not sure the timing is right with today’s market.

“It depends a lot on the economy,” he said. “Four or five years ago it made sense, but we were a brand-new startup and didn’t have the resources.”

For now, New West refers its customers to a few mortgage brokers in town – people they’ve gotten to know and trust over the years. With Greeley leading the nation in foreclosures, he thinks banks have gotten a bad name they don’t deserve. By the time New West begins originating its own mortgage loans, Ochsner hopes the industry’s negative reputation will have dissipated.

“People tend to blame it on banks,” he said. “But in reality it’s the individual mortgage lenders that caused the problems because they are still unregulated in Colorado,” although the state now requires independent mortgage brokers to be licensed. “I don’t think the average Joe on the street knows the difference. We’re frustrated as a commercial bank. We’ve seen so much crooked stuff with appraisers and brokers.”

What goes up must come down.

While consumers cross their fingers and wait for the adage to hold true, folks in the mortgage industry have had to react fast to higher rates and the resulting stall in business. For some area banks whose mortgage divisions grew and boomed when times were strong, the reaction has been to get out of the game altogether.

Centennial Bank of the West, with 15 Northern Colorado branches, eliminated its mortgage division last year. “Our mortgage department was closed due to the slowdown in the mortgage business,” Paul Taylor, executive vice president and chief financial officer of…

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