Will the mortgage industry witness another influx of non-traditional lenders?
The mortgage business has undergone some odd changes. For a long time, it was viewed as the irrevocable turf of the thrifts. That is no longer true. Mortgage lending has also usually been profitable, but never a perfect business. Portfolio lenders had a fairly high profit potential, but also fairly high risk. Mortgage bankers had less risk, but also less potential to build gross dollars of profit, and therefore, less potential to grow. Today, these fundamentals have changed, partly because of an active secondary market and the array of high yield, high-risk loan programs placed into the market over the past few years. Finally, the mortgage business was seldom one to attract “outsiders.” It was regulated and fragmented. Government controlled who could create a mortgage loan and where, and who could own a lending institution. Every town and village usually had an ample supply of lenders. In the heyday of U.S. business expansion, the allure was in manufacturing and selling the products that would fill a home, not supplying the funds to buy the empty shell. Now these fundamentals have changed most of all. Changes in the mortgage business have been part of the overall change in the financial services industry. In fact, the mortgage business has been affected more than any other financial industry segment by the half-steps that deregulation took, as well as laws and guidelines which seemed at times to change with the wind. Because of those changes, financial service companies have scrambled to use every available loophole in the law that would allow them to put in place a nationwide delivery system, to get a jump on the competition. Mortgage banking, unregulated by the federal government as banks and thrifts were, became one of the most popular loopholes for traditional lenders in the early and mid-1980s. In 2010, loopholes may be becoming most popular among non-traditional players. Abruptly, the action among the non-traditional players heated up in 1995. K-Mart made clear some of its intentions to become a very big mortgage company. General Motors Acceptance Corporation made two acquisitions which, by year-end, made its servicing portfolio the largest in the United States. And these were just two of the notable events. All in all, in 1995, the mortgage industry witnessed either the entrance or newly-initiated major growth plans of a large national retailer, two large automakers, a huge part of the life insurance industry, the two largest container manufacturers, and the two largest independent consumer finance companies. At the time, this was an invasion to beat any others we had ever seen in any industry. Never, to our knowledge, had companies of such differing base industries or companies of such huge combined size gone after a single industry segment in so short a time. It is astonishing, and should be so recorded in business history books, that the mortgage business in one year drew in K-Mart, GM, Ford, Prudential, Metropolitan, American Can, Owens-Illinois, Household Finance and Beneficial. At the time, American Can’s mortgage chief Ken Berg said, “The industry is just now being recognized. When we first went to Wall Street, people said, ‘What’s a mortgage banker?’ I think today they’ve found out.” Indeed, as they find out most things, Wall Street discovered mortgage banking most pleasantly by collecting fees and most recently by the collapse of the mortgage industry. In many areas reviewing the past may give us a light on the future. As was the case in 1995, non-traditional lenders entered a fragmented market. Likewise, could a new group of non-traditional lenders be in the stages of capturing market share and taking over where banks, savings and loans, and credit unions have either exited the business, purposely reduced their market share, or tightened credit requirements, thus limiting the borrower’s ability to obtain a mortgage? In a recent Wall Street Journal article, Karen Tally identified one such non-traditional banking company that is filling the void left by these financial institutions. Walmart expects a 50 percent increase this year in the number of the company’s stores offering bank-like services. This increase would give the retailer 1,500 “money centers” which is a little less than one for every two Walmarts in the country. The primary focus of these money centers is to attract the lower-income customers who do not have a significant banking relationship, which the federal government estimates to be one in four U.S. households. In Talley’s article, she quotes Jane Thompson, president of Walmart Financial Services in saying, “We think banks are not as interested in this customer and have a lot of other things on their plates, so we see a lot of space to service customers’ basic financial needs.” At the present time, the Walmart money centers generate three million to five million transactions per week. Although Walmart has tried and failed to obtain a bank charter in the past, fearing the company could force the bank it controls to lend to preferred parties and not to its competitors, who is to say that times will not evolve to let Walmart, as well as other non-traditional powerhouses, into the mortgage arena if for nothing more, but to try and serve a segment of the population which otherwise is starting to be culled out of the mix despite superior credit scores and the ability to repay a mortgage. As we all know, financial institutions must comply with federal, state and local requirements for lending, as well as banking services. However, many areas of the country are underserved in these areas which could open the door for non-traditional companies to enter a market. It will be interesting to see who may or may not enter the mortgage industry over the next few years. I would estimate the character of any entrant will be that of bigness. This, in part, is due to the capital it takes not only to start an operation, but to also maintain it until production levels can be reached, which sets the company into a self-sufficient mode. With all that has happened in the financial sector and the new proposed regulations, it could possibly be another cycle that will place non-traditional companies at the forefront of the industry as it did in the 1990s. Ed F. Wallace Jr., Ph.D. is the chief integration officer for Docu Prep Inc., a nationwide provider of closing documents and initial disclosure services, including secure electronic delivery tools, loan analysis testing, and dynamic selection of documents, bar coding, secured and certified eSignatures and eMortgages via LOS interfaces, Web services and standalone systems.