BANKING by Jean Gruss | Editor/Lee-Collier
Mortgage brokers are closing their doors as the credit crunch claims more victims. Banks may reclaim their status as residential lenders.
As bad as the credit crunch was in August, banks may be long-term beneficiaries of the residential mortgage meltdown.
That's because mortgage brokers, banks' main competitors in the residential lending area, have been going out of business as the market for residential loans dried up.
By contrast, banks can fund their own loans from customers' deposits and they can hold onto these loans during any protracted downturn in the credit markets.
"For the banks it's an opportunity to gain market share," says Carlos Fernandez-Guzman, senior vice president of neighborhood banking for Coral Gables-based BankUnited, the largest bank headquartered in the state and with offices in Southwest Florida. The bulk of BankUnited's loans are residential mortgages. "Just about everything we originate stays in the portfolio."
Other banks are getting ready for the eventual upturn in business when residential real estate recovers. "We just hired eight new originators; we're beefing up that piece of the market," says Colleen Kvetko, executive vice president with Fifth Third Bank in Naples.
Smaller community banks will also benefit from the mortgage-broker shakeout. "More of that mortgage business that banks used to have may come back to the banks," says Charles Conoley, president of Horizon Bancorp in Bradenton. "We lost a lot of that business because we didn't want to get into more risky lending."
"It does create some opportunities," says Bob Bassett, Colonial Bank's area president for Lee and Collier counties.
Colonial Bank plans to offer reverse mortgages later this month to compensate from the decline in traditional mortgages. "The pie isA getting smaller and we're looking for something that is going to fill some of that void," Bassett says. Colonial's operations stretch from Tampa to Naples.
Cape Coral-based Riverside Bank, with offices from Naples to Bradenton, has recently created a new reverse mortgage division. Reverse mortgages let older homeowners convert part of the equity in their home into tax-free income without having to sell their home.
"The market has dwindled so drastically," says Dan Grahl, senior vice president of Riverside's newly created reverse mortgage division. "What bus do I want to be on?" Grahl asks rhetorically. "One moving forward or the other moving backward?"
To be sure, the market for residential mortgages declined so much in some areas that banks may not benefit even if mortgage brokers disappear. "The number of requests have gone down, so it'll probably balance itself out," says Conoley.
Put it in reverse
In some parts of Southwest Florida hit hardest by the residential sales downturn, lenders are turning to reverse mortgages to keep business coming in.
A reverse mortgage is a loan that lets borrowers 62 years old or older convert part of their home equity into tax-free income without having to sell the house or give up the title. The bank is repaid when the borrower ceases to use the home, whether because of death, a move or a sale. The amount owed can never exceed the value of the home.
There are strict regulations and getting reverse mortgages approved can take as long as 60 days, as opposed to two weeks for a traditional mortgage. What's more, it requires banks to train employees extensively on the proper procedures.
But once banks overcome these hurdles, the market for reverse mortgages is potentially huge because of Florida's large elderly population. "I've been reading about how this industry has been growing at 50% a year," says Riverside's Grahl. "My own parents have a reverse mortgage. They live in Plant City."
"We've got our folks going through the training" for reverse mortgages, says Bassett. "If you look at the demographics...it's a pretty good sized market."
Still, other banks wonder whether there is a large market for reverse mortgages. "It's a very niche-driven market and we're not seeing the critical mass," says Fernandez-Guzman. Elderly Floridians don't tend to be as cash-poor as their counterparts in other states and heirs often are reluctant because their estate is being spent.
Despite the residential real estate downturn, bankers are still making residential loans. However, they are generally restricted from making the kinds of risky "subprime" loans that mortgage brokers have become known for.
For well-established local community banks such as Horizon Bank, much of the residential lending business comes from referrals. "Our loan demand has been very steady," Conoley says.
Some bankers concede that mortgage brokers will return when the market recovers and any market-share gain may be temporary. "They'll be right back as soon as times are good again," says Grahl.
Meanwhile, banks are focusing on other types of residential lending, such as home-equity loans and so-called "jumbo" loans.
"We have expanded and retooled some of the home equity products," says Fernandez Guzman. "That borrower who doesn't necessarily want to buy a new home will depend on equity."
Colonial Bank has been making "jumbo" loans to some of its existing customers at a quarter percent below prevailing rates, says Bassett. Jumbo loans are those greater than $417,000.
Here's one way to judge what's hot in banking: promotional postcards you get in the mail.
PostcardMania, the Clearwater-based postcard marketing company, says reverse-mortgage cards are the most popular cards among its bank clients.
"A lot of people are looking into reverse mortgages because it's a new product," says Joe Niewierski, vice president of marketing for PostcardMania.
The second most popular postcard now for bankers is encouraging prospects to switch from an adjustable-rate mortgage to a fixed one. Haven't most people with adjustable mortgages already switched to fixed rates? Apparently not, says Niewierski, because those cards are still selling well.
PostcardMania's worst selling bank postcard is the one that encourages renters to buy a home. "Because of the price of property, those are slower," Niewierski says.
But once those cards starts selling, it may be a good indicator that the residential real estate market has bottomed.
Trend. Mortgage brokers leave a vacuum for banks
Key. Banks that make residential loans may benefit as mortgage brokers go out of business.