Small Business Resources, Business Advice and Forms from AllBusiness.com
 

How to build mortgage banking business.

By Hisey, David C.
Publication: ABA Banking Journal
Date: Monday, November 1 1993

Although some financial institutions have always been heavily involved with mortgage banking, today we are seeing banks entering, re-entering, or enhancing their mortgage banking operations. They are doing so through de novo growth, expansion of existing operations, or, most commonly, through

acquisition, thereby leading to the re-emergence of banks as a major force in mortgage banking.

The field is open to the aggressive. The mortgage banking industry is relatively fragmented and therefore provides many opportunities for growth through gains in market share. The top producer of residential mortgages, based on 1992 dollar volume, has less than 4% of the total market share. The top ten producers in 1992 collectively had 21% of total market share versus 16% for the top ten producers in 1991.

Three sources of profit

The mortgage banking business provides opportunities for profit in each of its three main disciplines; origination, secondary marketing, and servicing. Overall, this represents a good way to earn fee income without putting assets on the balance sheet (unless servicing is purchased or acquired through a merger.

The greatest profits generally result from servicing, once a critical mass is achieved and economies of scale realized. Additionally, in this steep-yield-curve environment, there are profits to be made from the interest spread between mortgage loans held for sale and the debt to finance those loans for the 30 to 90 days the loans are held. And, with the exception of certain state requirements to pay interest on them, escrow accounts are a low-cost deposit source.

Mortgage banking activities, such as new loan originations, loan purchases, and servicing purchases provide new customers--and cross-selling opportunities--to a bank.

One possible drawback of mortgage banking to most financial institutions is the volatility of earnings, especially resulting from production operations. A further source of volatile earnings is the amortization of purchased mortgage servicing rights. in periods of high mortgage refinancing, this asset is subject to accelerated amortization due to prepayments.

What factors to weigh

There are pros and cons to each of the three routes to mortgage banking growth--establishing a de novo effort; expanding an existing operation; or acquiring someone else's shop.

In addition, make sure to read these articles:

  • STOP Creating Your Own Obstacles to the Sale
  • Over the last several months, I´ve noticed an increase of financial organizations, loan officers and mortgage companies, (at least the ones who want to keep ......
  • Developing Your Franchise Business Plan
  • The discipline of developing a franchise business plan lets you look at the challenges ahead and your expectations for your new business.
  • 60-Second Guide to Getting A Loan
  • While it is difficult to get a startup business loan without a proven track record, it's not impossible. In just 60-seconds, we'll show you how ......
  • Acting the part.
  • The line between mortgage broker and mortgage banker is starting to blur. With access to small warehouse lines, brokers are starting to look more like ......
  • Sub-servicing: an emerging niche.
  • SUB-SERVICING An emerging niche On May 12, 1989, Memphis-based National Mortage Company closed a deal to sub-service nearly 60,000 residential mortage loans and the related ......
  • Profit hedging.
  • A new way to smooth out the irregular earnings of mortgage banking companies is to hedge profits. Such an approach is designed to take the ......
  • Portraits of technology.
  • Portraits of TECHNOLOGY MANY MORTGAGE bankers consider advanced technology a competitive necessity in today's operating environment. To probe just how mortgage companies are integrating investments ......
  • GUI-based secondary marketing system unveiled; ASC...
  • CHICAGO--(BUSINESS WIRE)--March 8, 1995--Associated Software Consultants Inc. (ASC) Wednesday announced at the Mortgage Banking Association's Technology Conference in Chicago its development of PowerSeller(tm), a new ......
  • Building more profitable portfolios.
  • Mortgage companies should think strategically before they blindly sell off excess servicing. Maximizing profitability. Those two words have taken on great meaning in today's mortgage ......
  • QRM Announces Ninth New Mortgage Banking System...
  • CHICAGO--(BUSINESS WIRE)--Oct. 15, 1998-- More than 40 Percent of all Mortgages Originated in the United States are being Priced and Hedged using QRM's Mortgage Banking ......
  • Executive compensation.
  • Executive COMPENSATION If you are CEO of an independent mortgage company based in California, the odds are you make significantly more than your Midwest counterpart....
  • Under new management.
  • When a parent thrift gets tied up in RTC receivership, its subsidiaries get roped in as well. With the process slowly improving, however, some mortgage ......
  • The best of both worlds.
  • IN JULY 1987, PHH US Mortgage Corporation, (PHH USMC) Cherry Hill, New Jersey, was a small regional mortgage company whose strategy was to significantly increase ......
  • The subtleties of success.
  • Why are some players consistently the best at what they do? What are the qualities that set these top performers apart? In mortgage banking, two ......
  • S&P's corporate fitness test.
  • Standard & Poor's will run your company's divisions through the ropes to see where you come out in its industry rankings. The top ranking is ......
presented by