The recent rise in home mortgage interest rates has dampened customer demand for mortgage refinancing and pushed some financial institutions to downsize their mortgage operations in attempts to rebalance cost structures. The Business Journal’s Jane Yu asked executives at OC-based banks and local offices of national banks to address whether and how the current interest rate environment has affected their mortgage operations and to discuss any alternative channels they’ve located to offset the decline in mortgage lending and refinancing fees. Here’s an edited version of what they had to say.
Ash Patel, President, Chief Executive, Commercial Bank of California
Mortgage banking is a game of scale. To be good at it, you not only have to be able to grow the core business but be able to expand and contract the organization with each business cycle.
Because of the dynamic of having to hire and then lay off employees, Commercial Bank of California chooses not to be in the residential mortgage business. For banks that are, as rates go up, mortgage banking revenue will have to be offset by a variety of other fee sources, including overdraft protection, cash management fees, wealth management and other similar lines of business.
Kevin Reskey, Regional Sales Executive, Bank of America
We’ve helped thousands of homeowners refinance over the last few years but have always anticipated that interest rates would rise and the market would shift more toward a traditional focus on homebuying. We planned for that and are now focused on working directly with homebuyers.
As part of our planning for a more purchase-driven market, our mortgage operations have focused on the specific needs that purchase customers have. We’ve added mortgage loan officers to many of our banking centers to assist customers’ mortgage needs in the same location where they do their everyday banking.
We have product experts focused on certain loans—FHA or jumbo loans, for example—and we’re constantly improving our communication with customers so that they understand the loan process and have a better experience overall.
We’re also spending a great deal of time informing our business partners, like real estate professionals and homebuilders, about changes in the mortgage industry so that they are current and better able to serve our mutual customers.
We continue to focus on ways to grow by acquiring new customers and serving the needs of our own banking, small-business and wealth management customers. We’re also recruiting more loan officers to help us serve the home-buying demand in our area. For homebuyers, this means everything from guiding them through the loan application process to helping manage challenges, like changing interest rates or inventory shortages.
As market trends continue to show promising signs of sustained recovery, we remain committed to working with customers to help them achieve sustainable homeownership.
Scott Connella, Executive Vice President, Market President, Commercial Banking Union Bank
While some banks have exited mortgage banking, Union Bank remains committed to the home lending business. In fact, our mortgage lending operations have greatly expanded in recent years, with loan originations setting new records each month. The bank also opened a new regional operations center in Tempe, Ariz., to handle the increasing capacity, which supplements our service center in Brea. In addition, Union Bank is one of the nation’s largest lenders of jumbo mortgage loans, most of which originate on the West Coast.
We have a long history of providing our Orange County commercial customers competitive real estate financing alternatives, including owner-occupied loans for the real estate primarily utilized by the business; SBA 504 loans; and investor real estate financing.
For owner-occupied mortgages, my real estate team works with clients to structure a loan that meets their objectives of acquiring, building or refinancing commercial properties. The types of financing include permanent, bridge, construction, SBA, industrial/tax-exempt revenue bonds, and secured lines of credit.
Union Bank also finances properties throughout California, Oregon and Washington for real estate investor mortgages for loans between $500,000 and $5 million, for apartments, multifamily, or mobile home parks, retail businesses and industrial complexes.
Many of our clients that utilize commercial real estate financing are trying to manage risk more effectively in this volatile marketplace. Unpredictable changes in rates can adversely impact the liquidity, profitability and competitive position of a business—much as marketplace fluctuations affect homeowners who may be contemplating or completing purchases or refinances.
Union Bank offers a range of specialized products to enable borrowers to manage unpredictable market risks. These are financial products used to help borrowers and investors hedge, or reduce their financial exposure, against a sudden shift in interest rates. Our philosophy is that risk management is an integrated process, not simply an isolated transaction. Therefore, we take a long-range consultative approach to help our clients determine their risk appetite and create strategies tailored to their specific risk-reduction goals.
Stephen Gordon, Chief Executive, Opus Bank
Residential mortgage has never been a big business focus at Opus. We do that as an accommodation. For instance, if an entrepreneur who owns a business and has a relationship with us also wants to refinance their home, we can do that. It’s a small piece of what we do.
As a result of that, maybe we’ve left some money on the table that could have been made solely based on cyclical lower interest rates. But as a result of not being in that business, I don’t have an extra 100 people here at Opus supporting mortgage banking operation that we might have to contract as soon as rates go up.
The upward tick in rates of about 1% has resulted in a slowing down of refinance activity and is now making that business dependent on home purchase activity.
We focus on other, various avenues of banking, including commercial business lending, technology banking, healthcare banking, and institutional syndications, which is like investment banking. We get involved periodically in larger syndicated loans that involve larger banks.
We also have income property banking, which deals with multifamily and commercial real estate lending. Then we have fiduciary banking. We do retail banking only to the extent that we operate our branches, but we don’t do the small-consumer type of lending.
Kyle Kasperick, OC Mortgage Banking Senior, Lending Manager, JPMorgan Chase
JPMorgan Chase remains very committed to the mortgage banking industry. We service 7.3 million mortgages nationwide with a combined balance of $1.1 trillion, which ranks us as No. 2 in the industry in mortgage originations and servicing. This is an important business for the company and one we will continue to invest in.
The reality of the mortgage industry is that customers’ needs are changing. As the economy recovers from the housing crisis, fewer people are falling behind on their mortgages, and that’s good news. The percentage of delinquencies is down 60% since December 2009. We have adjusted our mortgage business accordingly by consolidating into fewer, larger locations.
On the production side, interest rates have increased a bit, but they still remain historically low. And this slight uptick is not discouraging people from buying new homes. In fact, it’s having the opposite effect. With the economy strengthening and people feeling more confident in their financial situation, now is the time to buy. Home prices are on the rise, so many want to get in now with the hope of continued home price appreciation.
California continues to be an important market for us. We employ more than 20,000 people in California, including 11,000 in Southern California. We have hundreds of mortgage bankers across the state to help Californians purchase a new home or refinance their existing home.
Ben Alvarado, OC Retail Bank President, Wells Fargo
Although the increase in mortgage interest rates is causing fewer refinances, our company’s diversified model provides for continued growth. The housing market is strong, and Americans are buying homes. This is good for our economy, good for individuals and families, and that in turn is good for our company.
Our strong financial results in the latest quarter demonstrated the benefit of our disciplined diversity. We earned a record of $5 billion and grew earnings per share to 99 cents, up 13% from a year ago. We saw a broad-based growth through diverse channels, and we expect that growth to continue.
We extended $14.2 billion of new loan commitments to small-business customers during the first nine months of the year, up 24%. We had strong loan growth in our auto business, with balances up 9% from a year ago. Our credit card business continues household penetration, up 36% from a year ago. We are continuing our commitment in our wealth, brokerage and retirement sector, having just completed a new trading floor in Charlotte, N.C. Commercial business is extremely strong for us, as well. As an example, we had a 10% increase in treasury management.
In the retail bank, we are concentrating our efforts on relationships. Our deposit growth remains strong, with average deposits up year-over-year. Our primary consumer checking customers grew by 3.9% over the past year. We think our customers benefit when they use Wells Fargo for as many products as possible, so we are focusing on cross-selling, and we achieved a record of 6.15 products per household, up from 6.04 a year ago.
This year, Wells Fargo became the last major bank to continue to provide student loans because we know that is an area of need for our customers.
Chris Walsh, Chief Executive, Sunwest Bank
In 2009, we started our mortgage operations, focused on jumbo loans. We got out of that business within a year, mainly because of regulatory issues.
If a bank can really make a machine out of this and do a lot of volume, it can make money. But if you can’t do volume, the regulatory issues will outweigh the potential income 10 times over.
For a lot of banks, generally, mortgage banking was a nice way to generate a good fee income if they could collect a book of business and sell the loans off to secondary markets. It’s tough to do that nowadays.
Commercial banks then need to find something that will offset that decline in fee income. We got out of the mortgage business and decided to go after niche lending. Some of the areas we went into were rediscount lending, insurance premium financing, and construction lending when nobody was doing that. We loved construction lending. I think within the next couple of years, we’ll probably pull back out a little bit. It was good for us that we worked to find that niche that no one wanted to do.
