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Overcapacity revisited?

The last big refi boom of 1986/1987 was followed by a painful round of branch closings and layoffs, as the industry tried to shrink back down to normal size using a kind of crash diet approach.

This time around could it conceivably be different? Will there be another crash diet (the Ultra Slim Fast approach) or is the industry controlling its size by staying on some kind of conservative, maintenance diet?

Is it really possible that somehow, some way, the new branches and staff being added to service the refi boom of 1992/1993 will remain cost effective when total industry originations shrink by say some $150 billion to $200 billion? Is it possible that everybody will simply take a larger share of somebody else's purchase market share? No. It's not possible. So what are mortgage executives thinking this time around when they are out there building their branch networks up with refi profits? We asked a few to find out if things are going to be different this time around.

"The answer is maybe it's different and maybe it's not," said David Frank, president and chief operating officer of Margaretten & Company, Inc., Perth Amboy, New Jersey. He says that when the refi boom began this time around, it was relatively easy to staff up with part-time employees and overtime. But the longer the refi boom has gone on, the more the tendency has been to add more and more permanent staff. And he notes permanent staff are a "very sticky" commodity, it is very difficult to trim their ranks once they've come on board.

Frank notes that we are in the third wave of the current refi boom and he "could see rates still trending downward" more this year. The Margaretten executive says you can only use overtime and part time staffing for so long to deal with the volume boom before these employees burn out from long hours.

Frank says Margaretten has added 10 branches to its total of 69 wholesale and retail branches since the start of 1992. He says three were in Florida, which Margaretten views as a growth market, but the rest were around the country. He says, "My concern is not the number of branches we have, it's the staffing levels." Frank adds that he is "very concerned" about building up the permanent staffing to levels that are unsustainable once a volume decline hits. He notes that "you are always late in cutting" once a true falloff in volume comes.

Even so, staffing levels are a true dilemma currently, particularly when rates continue to threaten to drop further, which would mean lenders will face more waves of refi business. Frank says it's important to watch staffing levels "not just on the way down, but on the way up too." He says Margaretten management watches staffing and costs and the level of activity and tries to see that all are in alignment. Frank says one way to know whether they're in alignment is if you're keeping your commitments with no trouble.

Frank sees total originations this year coming in close to $850 billion, with the industry refi average coming down a bit from last year's roughly 50 percent level. He says Margaretten's refi percentage in 1992 was 42 percent, and he sees the number this year "maybe approaching 40 percent."

Margaretten tallied up $7.8 billion in production last year from all its sources of originations and is looking to do "more" this year, with Frank declining to supply any real numbers.

He says the drop in rates has come because "I don't think the bond market believes |Clinton's~ economic proposals are sound." He adds, "The bond market is saying there will be less growth with Clinton's economic package and the bond market likes bad news. And that's what's going on now."

Another large mortgage lender that is significantly adding to its production capacity, with two pending New England bank acquisitions by its parent, is BancBoston Mortgage Corporation, Jacksonville, Florida.

Wayne Long, senior vice president, says that his company is expanding its retail production operation further by opening two new satellite offices (one in Hollywood, Florida) and a second full-service office in the Chicago market. He said the company's total retail branch count is 32 outlets.

Long says, "I think large players are looking at taking advantage of opportunities in growing markets" in terms of opening new branches. He adds that "a lot of people are looking at Texas" and that "Denver is an attractive market right now and the D.C. area is a strong market."

Long says that this time around the production capacity buildup for his company will be different than the 1988 experience because "we're not building large branches to support refi activity." He says BancBoston has selected expansion plans to build capacity where the company already has a presence and established relationships with Realtors. For example, in Chicago, the lender has downsized the existing office and is using some of those personnel to staff the new office. This approach allows BancBoston to broaden the territory it can cover in the Chicago market.

Also, the move to laptops for all 150 loan officers and centralizing of all processing activity out of two locations--Jacksonville and Canton, Massachusetts--permit BancBoston to reduce its local branch office space requirements and reduces the personnel needed in each branch. As a result of these moves and others, BancBoston "significantly reduced |its~ branch overhead in 1992," Long says.

One mortgage company that doesn't have to worry about building up too much brick and mortar overhead is Merrill Lynch Credit Corp. A nationwide network of 465 stock brokerage branches supply the leads that fuel the production done by this mortgage company. Based in Jacksonville, Merrill Lynch Credit relies on leads from Merrill stockbrokers and from direct consumer response to ads carrying 800 numbers placed in major financial newspapers and magazines. The mortgage company's products and services are also promoted in stuffers in monthly statements sent to Merrill Lynch investment customers. Mark Johnston, chairman of Merrill Lynch Credit Corp., says "over 600 million customer communications go out every month" to potential customers of the mortgage operation. The mortgage application is done over the phone and via the mail with the help of a network of local closing agents.

Johnston says that there is centralized processing done in Jacksonville, with a satellite office located in Minneapolis. The mortgage company currently has 65 regional loan officers in its headquarters that divide up the mortgage business that comes in to be processed. The loan officers are given responsibility for all the mortgage business that comes in from certain Merrill Lynch brokerage offices. The business that comes in over the tollfree number is assigned to the person handling that particular ZIP code. Johnston says these staffers are "relationship managers not processors." The average cost to originate a loan, Johnston says, is $1,400.

Merrill Lynch Credit Corp. did $1.5 billion in originations in 1992 and expects to do $3 billion this year, Johnston says. His company only started doing conforming mortgages in April 1992 and only started offering jumbo fixed-rate products in October of last year. Merrill Lynch Credit began offering mortgages in July 1990 when it launched the Prime First program, a jumbo variable rate mortgage tied to the prime. Johnston says his company keeps all its servicing and the portfolio now totals close to $5 billion. The key to the strategy is to never sell any servicing but to keep these customer relationships and cross-sell these customers the other financial products and services Merrill Lynch offers through its financial consultants.

Johnston says the goal for the mortgage company is to capture the mortgage business from a bigger slice of the Merrill Lynch brokerage customer base. There are roughly 11,500 "financial consultants" in the brokerage offices around the country and Johnston says that if each one delivered just one conforming and one jumbo loan that would bring in more than $5 billion in production.

As far as Realtor reluctance to let a loan go to a long-distance source for processing and underwriting with no local loan officer to deal with, Johnston says what makes his deals work is that Merrill Lynch's client base is made up of sophisticated consumers who direct their own mortgage transactions. Besides, he says, his company gets quick acceptance from Realtors who deal in high-end properties once they see that Merrill feels comfortable doing a $2 million loan. "A $2 million loan is not unusual here at all," Johnston says.
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:cost-effective expansion strategies of mortgage banks
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Date:Apr 1, 1993
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