De Novo Institutions Eyeball Residential Lending

I t is easy to assume that the least likely time to launch a new financial institution is during one of the worst economic crises in U.S. history. Futhermore, why would a de novo institution focus on residential lending at a time when the housing market has flatlined?

Despite the economic crisis, de novo financial institutions are opening across the country – albeit at a lower rate than in previous years. According to the Federal Deposit Insurance Corp., 78 new banks opened for business during the 12-month period that ended March 1, 2009. In the previous 12-month period, 173 new banks opened.
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According to Jason Marx, vice president and general manager of Wolters Kluwers Financial Services' mortgage division in Minneapolis, the timing couldn't be better for start-up financial institutions to get into residential lending.

‘These banks have no legacy problems with their portfolios and technology,’ he says. ‘They are going in with a clean sheet of paper and pursuing applications that encourage growth.’

Nicholas Ketcha, managing director at FinPro Inc. in Liberty Center, N.J., notes that a new wave of community banks and thrifts is putting residential lending in the company's viewfinder.

‘Look at the whole industry,’ he observes. ‘The growth of mortgage banks and nonbank lenders basically took over the mortgage market. The percentage of originations from thrifts declined. Now, there are a number of thrifts operating to reclaim part of the market – along with community banks that are functioning more like thrifts.’

Typical of this new wave is Veritas Bank in Lawrence, Mass., which is set to open in May. With an initial marketplace covering the Merrimack Valley section of Massachusetts, the bank has included residential home loans as part of its initial product offering.

‘Probably one-third of our portfolio will consist of lending to the residential market,’ says Pedro Arce, president and CEO. ‘There is a lot of demand here for refinancing, and first-time home buyers want to take advantage of the lower costs and lower interest rates.’
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Arce adds that Veritas Bank will offer ‘very standard’ mortgages and will work with MassHousing, the state's housing finance agency, to assist qualified first-time borrowers. Despite the current economic situation, Arce is looking ahead and has determined that residential lending will help expand the bank's presence and profits.

‘We see residential lending as a gradual and long-term growth opportunity,’ he says.

Another de novo institution, the Bank of Fairfield in Fairfield, Conn., was established in August 2008 and is offering a mix of conforming and jumbo loans as part of its lending package. According to Diane Knetzger, marketing director, the bank's biggest challenge has been an obstacle faced by any new company: gaining recognition.

‘We are the only hometown bank in Fairfield,’ she says, noting the presence of branches from substantially larger competition, including Chase and Citibank, within walking distance of her office. ‘But we want to be perceived as a hometown bank, with a high level of involvement in the community. We have local people in our staff, management and board.’

Knetzger points out that community banks have a distinctive advantage over other financial institutions: Many customers perceive a greater sense of rapport with a local business officer, rather than a representative from a mega-corporation. This is especially important during the home mortgage process, she notes, where personalized service is designed to help local residents through a myriad of paperwork and rate information.

Some de novo nonbanks are also setting up shop. Real Estate Mortgage Network, based in Kennesaw, Ga., opened in February 2008. As a mortgage banking operation in a time when public opinion of the industry is not high, the company has adopted a strategy to focus on playing up the professional reputations of its staff.

‘The best marketing strategy we can create is to use the reputation of those who represent our name in the field,’ says Dave Caudill, senior underwriter. ‘As big of an industry as this is, the mortgage market is still a small world, and reputation equals a decrease in spending.’

However, de novo institutions have their share of challenges. While Caudill's company stresses its in-house expertise, FinPro's Ketcha observes that many de novo institutions aren't moving into the residential lending market for personnel reasons.

‘They don't have the staffing in-house to do the monitoring and servicing,’ he says.

For his part, Caudill notes that the current economy dictates the depth and scope of the products he can make available.

‘While home buyers have read about how the mortgage industry has been shaken, they don't yet fully understand that their options have been severely reduced, so they still want as many choices as possible,’ he says. ‘Currently, there are fewer programs available, which means fewer customers that will fit into those product types, and the programs that still exist are changing every day. Trying to find that balance between conservative and innovative is the biggest challenge we face.’

For Vertias Bank's Arce, the question of whether to keep residential loans in the portfolio or to wade into the secondary market has yet to be resolved. ‘We're debating that right now.’

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