A couple of months ago, a homeowner near Boston was notified that he should no longer send his monthly mortgage payments to the local mortgage company. A relationship that had lasted less than two years was already over. The homeowner is now sending his payments to a savings-and-loan in New Jersey. The homeowner may have felt like a piece of used office furniture up for sale, but he was just one part of a national restructuring of the mortgage market.
Getting a home loan used to be a local business, where all home buyers took out mortgages with hometown lenders and kept the relationship with that lender until they moved or the loan was paid off. Today, a buyer in Massachusetts may get his mortgage from a lender based in California, and send his monthly payments to a company in New York.
Spurred by the need to diversify loan portfolios, and a desire for a bigger share of one of the most profitable parts of the financial services business, a few savings-and-loans, banks, manufacturers, and financial service companies have spread into the prime real estate markets around the United States. They've opened new offices, bought failing savings-and-loans and turned them into moneymaking mortgage operations, and bought profitable mortgage divisions from banks that wanted to concentrate on other areas.
As a result, about two dozen companies now control almost a quarter of the $300 billion- to $400 billion-a-year mortgage market. While no one company owns more than 2 or 3 percent of it, the influence these few businesses have on the interest rates, terms, and types of mortgages far outweighs their shares.
In the next 10 years, the number of major players is expected to shrink to fewer than a dozen, but they could control more than half the mortgage business.
A few years ago, names like H.F. Ahmanson, Great Western, Lomas & Nettleton, First Nationwide, and Goldome were almost unknown outside their home territories. Today, they have offices competing with local lenders - and each other - in Boston, New York, Washington, Miami, Chicago, Atlanta, San Francisco, and Los Angeles.
Then there are companies like General Motors, Ford, Primerica (formerly American Can), and Citicorp, all of which have large mortgage divisions.
``It's a clear trend,'' says Roger Blood, senior consultant, at Temple, Barker & Sloane Inc., a Lexington, Mass., consulting firm. ``It's been under way for two or three years, but it's just as strong now, if not accelerating.''
For now, some of these companies are growing by specializing. Some specialize in ``originating'' loans; that is, they take the application, approve the loan, and lend the money. Others (like the savings-and-loan in New Jersey) focus on ``servicing'' the loan. For a fee, they receive the monthly payments, hold money in escrow until they pay property taxes and insurance, and send the homeowner an annual statement.
(The fees for servicing each loan are fairly small, ranging from $2,500 to $5,000 for a $100,000 mortgage, but some companies service several hundred thousand of them.)
Other companies - especially the largest ones - both originate and service loans, as well as loans bought from other lenders. The large companies then use the servicing income to help maintain competitive mortgage rates - and to buy new offices.
In most cases, Mr. Blood and others say, dealing with a large multibillion-dollar lender with its home base 3,000 miles away has been a plus for consumers. Precisely because these companies are competing with local lenders who know their markets, real estate agents, and many of their customers, the larger players have put more emphasis on service, starting with the loan application process and continuing through the monthly payments.
``The national lenders are very service conscious,'' Blood says. ``They aren't going to take an impersonal view to what they are doing. If anything, they have a more well-developed idea of how to service people personally. I think you'll find the large companies are the ones who start having 24-hour service, and will come to your home, and will lead the way in that regard.''
``The objective of the national mortgage lender in these markets is to behave like a local mortgage originator, understanding the market and providing the level of service a local lender would,'' says Ronald Leet, executive vice-president of Goldome Realty Corporation, a subsidiary of Goldome Bank in Buffalo, N.Y.
About four years ago, Mr. Leet says, Goldome began expanding around the country and now has 37 offices in places like Honolulu; West Palm Beach, Fla.; Long Island; Alaska; and Seattle. Last year Goldome bought the Rainier Mortgage Company in Washington State from Rainier Bank.
In the last two years, Goldome originated about $7.25 billion in mortgages. With a slower housing market this year, it expects to write about $2.5 billion in loans.
``People have spread throughout the country for a number of reasons,'' Leet says. ``One is to diversify portfolios, to get into markets where there's more activity.... If the economy in the Pacific Northwest goes bad, it's probably not going to affect the Southeast.''
Another reason for the rapid spread of large mortgage operations is the changes in the mortgage business, many of which were designed to prevent a repeat of the debacles the thrift industry went through in the late 1970s and early '80s. That was when Congress deregulated the interest rates banks and thrifts could pay on savings. As a result, banks had to pay more for savings, while old mortgages in their portfolios brought in the same income they had for 10 to 20 years or more.
To prevent that from happening again, the lenders adopted several strategies, notably the adjustable-rate loan. This not only let buyers get into homes at a lower initial rate, it also gave the banks some protection from future jumps in high interest rates.
Another protective device was the secondary market, where banks sold packages of loans to investors to raise money for new loans and - most important - get those loans out of their portfolios before they did any damage. Often, this system favors the large lenders who have more loans to sell.
``The small association in a small town or a small association in a large town just doesn't have access to a diverse pool of funds to supply a mortgage market,'' says James F. Montgomery, chairman and chief executive officer of Great Western Financial Corporation of Los Angeles. ``The one thing that we can say to our agents and brokers is that we'll always be there. We'll always have a supply of lendable funds.'' Last year, Great Western originated $9.5 billion in mortgages and serviced nearly $7 billion of mortgages for other lenders.
Moving to other states, of course, greatly enlarges the sources of home loans and gives a lender more mortgages to sell, service, or both.
``If all we needed was loans for our portfolio, we could have stayed in California,'' says Mario J. Antoci, president and chief operating officer of H.F. Ahmanson & Co. in Los Angeles. ``We have a substantial share of the market here, and we might have been able to improve on it a little. But at a certain point, it's much more difficult to capture more of the market.
``So the way we had to do it is to move to other states.'' In addition to California, Ahmanson has mortgage offices in 10 states. Last year, it originated $11.3 billion of mortgages, up from $3.8 billion in 1983.
``Right now our primary interest is in the Northeast,'' Mr. Antoci says, ``because of the types of loans that are big there, single family loans.'' He also likes the Northeast because home prices there, like his home base in California, are higher.
``The Northeast is profitable lending,'' he says. ``The average size loan in the Northeast is much higher than, say, the Midwest, where the average loan might be $50,000. With the same amount of work we can lend three times the amount of money, so it makes it much more efficient.''
While Ahmanson has increased its mortgage business by rapid growth, other lenders who took this route before have pulled back. Lomas & Nettleton Financial Corporation, for instance, has closed more than 70 of its 100 mortgage origination offices. ``Costs were very high,'' says one mortgage expert who has frequent contact with the company. ``They closed virtually every branch that wasn't carrying its own weight in making money. They plan to rebuild that network, but on a more cost-effective basis.''
Although Ahmanson and Great Western are considered strong companies, all of this expansion of the mortgage business, especially by savings-and-loans at a time when other parts of the thrift industry are having their problems, worries some people.
``The concern for the mortgage bankers is that a thrift can bury its problems in its portfolio,'' says Warren Lasko, an economist and executive vice-president of the Mortgage Bankers Association of America. ``That is, they can make loans at very aggressive rates and hold them and hope that interest rates come down so it looks like a good yield in the future. They're capturing market share that way, but they may risk the wrath of the FSLIC [Federal Saving and Loan Insurance Corporation, which insures S&L deposits] if those turn out not to be profitable.''
That doesn't mean consumers should avoid lenders with low rates, Mr. Lasko says. ``If an institution wants to make a below-market mortgage, take it. The mortgage business was terrific in 1986 and early '87 and a lot of lenders staffed up, opened new branches. Now, with business down, they're beating each other up competitively, so the consumer's getting as good a deal as he's seen in a long time.''
But low rates aren't the only thing that will produce the winners and losers among the giant companies, or keep the small, local lenders in business.
``On the origination side, there's room for the little guy,'' Lasko says. ``Loan production is still a localized business, where knowing the Realtor, having a personal relationship, is very important.''
``It's a customer service business,'' Mr. Leet at Goldome says. ``He who can provide the fastest, most efficient loan application processing and loan closing has an advantage. You have to be able to offer a product at a competitive price that meets the consumer's demand. No one wants the cheapest price in town if they have to wait six months to get the loan.''
``There's always going to be room for the small player, the hometown thrift,'' Mr. Antoci at Ahmanson says. ``We can't be everywhere. So there will always be a place for them. But as far as market share is concerned, sure, the major ones will capture the most market share.''