Bank Board Letter July 2014 : Page 2

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IN-HOUSE MORTGAGE LENDING DEPARTMENTS DWINDLE

Monte Robbins


On any given day, several economists will offer different opinions on the current state of the housing market and real estate lending environment. While their forecasts and state-of-the-market summaries may be varied, we can all agree on one thing:There has been a paradigm shift in mortgage banking.

Running a profitable mortgage lending operation has become incredibly challenging, especially after the rate spike last year. In fact, many banks are calling it quits — and who can blame them? Overhead costs are getting higher and regulations are getting tougher. Bank presidents are facing the grim reality that the 2012 mortgage profit center is now a 2014 mortgage cost center.

Included in the overhead expense category are the systems and software necessary to manage real estate loan files, computer hardware, office space and highly trained personnel to handle everything from origination to post-closing.

Beyond the obstacle of cost, banks must also be prepared to manage the risk and compliance that goes along with operating a mortgage lending department. And unfortunately, doing so got considerably more difficult and expensive in 2014, when new lending regulations began to take effect — two of which include guidelines related to the ability-to-repay rule and qualified mortgage standards.

It goes without saying that it is absolutely integral for banks with mortgage departments to employ an airtight quality control operation to ensure compliance with these new regulations (as well as all the others). Failure to do so could put banks at risk of regulatory violations resulting in disciplinary action including civil money penalties. Let’s face it — not all banks have the capital and/or desire to manage this vast amount of risk, let alone the stress.

SO WHAT’S A BANK TO DO?
While some have taken this route, simply not offering home financing has its drawbacks, too. Customer retention will likely suffer, as bank customers who need to refinance or purchase a home will be forced to walk down the street to the competitor. And one can only assume that the competitor will make a play to secure additional accounts from these customers. Now we’re talking deduction of serious fee income from lost deposit accounts.

In addition, studies show that banking consumers want a one-stop shop in their financial institutions. If your bank doesn’t offer any type of (or limited) home financing options, it has a sizeable hole in its portfolio of products. Even if you don’t consider real estate lending to be a major profit center, mortgage loans are a convenience to your customer base. When you cut this important service, your bank has lost a significant amount of marketability.

ENTER THIRD-PARTY ORIGINATORS
More and more banks are signing up to outsource their mortgage lending operations to companies that provide third-party origination services. Not only does outsourcing negate the majority of overhead costs associated with mortgage lending, but most third-party origination providers also take on all quality control and compliance risk for their bank clients.

Since the end goal is to make a profit, creating a marketing strategy is the final piece to the puzzle. Some third-party origination providers offer complimentary marketing consulting as part of the sign-on package. It’s great to have conventional, FHA, VA and second mortgages, but the key is how to market it to your customers.

Mortgage lending is like anything else in that those who don’t have the necessary experience or the capital should look to strategic partners. Most third-party origination providers have already built an efficient and compliant infrastructure. It made sense for us to get into this business because we are already absorbing the monthly overhead cost. Adding additional loans in our pipeline helps our profitability and is a no-brainer for our clients who simply want a fully compliant fulfillment partner.

In conclusion, having some type of mortgage lending operation is imperative for client retention and marketability reasons. Outsourcing it eliminates overhead cost and compliance burden. It truly is the best of both worlds.

If this article were summarized in the form of a mathematical equation, it would look like this:
(Mortgage Lending Infrastructure + Fulfillment)
– (Overhead Costs + Risk)
= Profit Center

Monte Robbins is president and CEO of CapWest Mortgage, a division of Farmers Bank and Trust, Great Bend, Kan. CapWest is a national third-party origination service provider. For more information, contact Jake Stadler, director of TPO for CapWest Mortgage, at 913-378-9066 or jake@capwestmortgage.com.

Read the full article at http://omagdigital.com/article/IN-HOUSE+MORTGAGE+LENDING+DEPARTMENTS+DWINDLE/1761608/217633/article.html.

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